Rachel Reeves, the new UK Chancellor, clearly found herself under the spotlight after her pre-Budget speech in No. 10. In her speech she took on Britain’s productivity crisis and what it means for the country’s public finances. In her speech, she confirmed she has a £9.9 billion headroom for March 2025. This figure is not new, having made an appearance in her last Autumn budget. The announcement was met with shock and awe, largely from the opposition Conservative Party. They claim she’s using a play-the-sky-is-falling approach as a “smokescreen” to cover her tracks on raising taxes.
In a session with the Treasury Select Committee, Professor David Miles from the Office for Budget Responsibility (OBR) clarified that Reeves’ comments were “not inconsistent” with the economic situation she was managing. He emphasized the pressing fiscal challenges that the government faced, stating, “I don’t think it was misleading, for my own view, for the chancellor to say that the fiscal position was very challenging at the beginning of that week.”
OBR’s future forecast document hit the releases were even made too early, detailing on new fiscal measures on budget before Reeves was able to make them official. Miles’ appearance before Parliament, accompanied by Tom Josephs, another OBR bigwig. Combined, they solved the scandal with the early release of the document, Josephs sending an apology from the docket. Josephs promised the committee that the OBR would adopt recommendations resulting from an audit into the accident’s cause.
Reeves had recently cautioned that the UK’s productivity was underwhelming and lagging behind goals. She explained how this new reality would mean less tax receipts, inevitably affecting the health of public finances. Chancellor’s fiscal discipline is on full display with his operation with a £4.2 billion margin for error. This figure is £9.9 billion less than the amount she had to spend in her last budget. Miles remarked on this reduced buffer: “It was by a tiny margin,” and he cautioned against interpreting it as a positive indicator of fiscal health.
Recent events have heaped unprecedented challenges on the OBR. Richard Hughes stepped down from his role, accepting “full responsibility” for the mistakes revealed in a probe into the organization’s blunders. This failure would turn out to be one of the biggest in OBR’s 15-year history.
In reality, chancellors aired on the side of having buffers of between £20 billion and £30 billion before November 2022. This headroom of £4.2 billion looks alarming enough to put the long term fiscal sustainability into question. That’s particularly pressing given recent government U-turns on welfare and winter fuel payments, which weren’t factored into the forecasts. Had these been accounted for, Miles explained, that buffer would have further shrunk to a minus £3 billion.