Labour MPs who attack the OBR should take a look at themselves

It has been one of the more predictable u-turns in UK politics. In April 2024 I noted in these pages the high likelihood this would happen. That prediction didn’t require much skill. The very point of a watchdog is to speak truth unto power. When out of power, like Labour had been for all the OBR’s history, Labour were only too happy to be full-throated in their support of the watchdog’s role. Indeed, one of Labour’s first acts of government last year was to strengthen the OBR’s oversight role. Now after fourteen months in power a range of Labour MPs are the painting the OBR as a barrier to the party’s spending plans. Hypocrisy comes in many forms in politics. This is a particularly egregious case.

None of this is to suggest the OBR is above reproach, nor indeed that it should exist at all. Its forecasting record has been modest, and the UK economy performed perfectly well for decades before the OBR was created in 2010. There is nothing pre-ordained about having an independent body to mark the government’s economic homework. It is also a quirk of timing that the OBR is about to be front and centre of the next fiscal event - the Budget on 26 November - as it revisits its estimate of how fast the UK economy can grow. A widely expected downgrade to the OBR’s productivity assumption is not Labour’s fault but it is their Chancellor, Rachel Reeves, who has to deal with the multi-billion pound implications.

Amidst this disquiet there are some thoughtful ideas on how the OBR’s role could change - including recent work from the New Economics Foundation suggesting space for the Chancellor to disagree with the OBR’s findings. In Donald Trump’s United States his Treasury Secretary, Scott Bessent, has publicly disagreed with the Congressional Budget Office (CBO) - the OBR’s US equivalent - on their latest outlook for the US growth and the deficit. What was remarkable is how little financial markets cared about that public disagreement. That being said the US - virtue of being home to the world’s reserve currency - plays by different fiscal rules to the rest of the world.

There are two time-honored truisms in making public policy. Firstly, it is far easier to establish a public body than to disband one. Former Prime Minister, Liz Truss, tried to sideline the OBR and still hankers after their evisceration. But she ignored the second truism - attempt change from a position of strength, not from weakness. The current protestations from Labour MPs look the result of being unable to stomach even modest public spending cuts, and regret at the inflationary fallout of their jobs market reforms. Truss’s 2022 attack on the OBR was made against the backdrop of 11% UK inflation, and market skepticism on whether she could lead her party to contentious supply-side reforms and spending cuts. Liz Truss didn’t crash the UK economy, but she did provide a textbook example of how not to reform the UK’s economic institutions.

And here is the rub. With or without the OBR there is another arbitrator of the government’s economic plans – the bond market. That market has lent a cumulative £2.8 trillion to UK governments. Paying the interest on those bonds now costs taxpayers £111bn a year. This figure has risen sharply in recent years amidst higher inflation and the higher interest rates needed to lean into inflation. A quarter of those interest payments go to international investors.

The bond market is now showing concern about the fiscal policy set to be unveiled at the Budget. Over the last decade the UK has typically paid 0.8% less than the most expensive 10-year debt in the G7. Today it is paying 0.6% more than any other G7 economy. That higher interest rate spread first emerged after the 2022 Mini Budget, grew further as the UK experienced more persistent inflation during the recent energy crisis, and has reached its highest level as the market absorbed the greater borrowing undertaken by this Labour government. That is not the OBR taking a dim view of the UK’s tax and spending plans. This is people with choices on where they place their money demanding higher compensation to fund UK government spending.

So, for those angling for the immediate abolition of the OBR, or the fiscal rules they assess, ask yourselves some questions. Is it the OBR that has failed to address the crippling cost of the triple lock pension? Is the OBR that has led to public sector productivity being lower today than in 1997? Is it the OBR that have created the most expensive energy market in the Western world, and the stupidity of current energy policy in the North Sea? Is it the OBR that has presided over Personal Independence Payments (PIP) recipients soaring by more than 70% in just five years. The answer to all these questions is patently “no”. But this is the backdrop as investors assess whether to give more money for the UK to live beyond its means.

The issue is that, at present, fiscal rules and an independent OBR are signals to the UK’s creditors that there is at least the semblance of a plan to manage the public finances responsibly. Without significant reform, tax and spending is forecast to make up 60% of the UK economy by 2075 as the population ages, carbon taxes diminish, and infrastructure ages. No such signals would be necessary if governments showed signs of tackling those questions seriously. If Labour MPs want to remove the fiscal straitjacket that they consider the OBR and fiscal rules to be, they need to prove they can come up with sane plans. The bond market has concluded they cannot