Rachel Reeves has been accused of misleading the public by exaggerating the fragile state of the public finances in the run-up to this week’s Budget, to justify tax rises for higher welfare spending.
The row was triggered by revelations from fiscal watchdog the Office for Budget Responsibility on Friday that official forecasts for the public finances were healthier than the chancellor suggested earlier in the autumn.
So what did Reeves say — and what did she know — in the past three months?
August 7: It was during the dog days of the Westminster summer recess that the OBR got in touch with the chancellor. Richard Hughes, chair of the OBR, sent a private note summarising the outcome of the fiscal watchdog’s pre-Budget assessment of the supply side of the UK economy.
The note carried the news that Labour ministers had feared for months: the OBR would reduce its central forecast for productivity growth by 0.3 percentage points. This alone would knock the public finances by £16bn, according to last week’s Budget documents.
The move came after an annual “stocktake” of the economy by the OBR. The downgrade had long been anticipated by economists because the OBR’s previous outlook had implied an unlikely growth rebound.
September 17: The OBR conveyed its preliminary economic forecasts to the Treasury. This confirmed the productivity downgrade but crucially suggested that the impact would be largely offset by increases in real wages and inflation.
Reeves has set a fiscal rule under which the government needs to fully fund day-to-day spending with revenue by 2029-30.
The OBR’s full fiscal forecast, which arrived on October 3, suggested that the government’s current balance target would be missed by £2.5bn. If Reeves wanted to maintain her existing fiscal headroom of £10bn she would need to raise around £12.5bn through tax rises or spending cuts.
September 26: In an interview with The Times on the eve of the Labour party conference in Liverpool, Reeves hinted at tax rises, blaming the “challenging” productivity downgrade, while ignoring the offsetting factors mitigating the problem. She vowed: “I will respond to it because it is important that I can give that confidence that we’ll continue to provide economic stability.”
September 29: The chancellor said she had not received the OBR’s final predictions but acknowledged that “we will respond to those with a combination of changes, if needed, to tax and spending”.
October 20: The OBR sent an update to its forecasts in which its predictions were somewhat rosier. It estimated that the government would be on track to hit its fiscal target with a spare margin of £2.1bn — still lower than the previous fiscal headroom.
October 27: The FT revealed that the OBR had made a 0.3 percentage point reduction to its trend productivity growth forecast. It cited analysts’ estimates that this could deliver a £20bn hit to the public finances, while adding that offsetting factors could influence the final size of the fiscal hole. External forecasters differed on what the productivity downgrade would mean, with analysts such as Michael Saunders at Oxford Economics stressing that it could be balanced out by higher wage forecasts.
October 27: As speculation mounted about income tax rises, Reeves used a speech in Saudi Arabia to say she was willing and ready to raise taxes to meet her fiscal rules and provide resilience against future shocks. She added that the OBR was “likely to downgrade productivity” as a result of the financial crisis and Brexit.
October 31: The OBR passed its final pre-measures forecast to the Treasury, by which point the public finances had improved again. The government was on track to meet its fiscal target by £4.2bn. This was lower than the £10bn of fiscal headroom in March, but only by £6bn or so.
Reeves could now have hit her fiscal targets with no tax rises, but the chancellor would still have faced a fierce investor backlash by leaving such a fine margin.
The chancellor also needed to find close to £7bn to pay for previous U-turns on cutting disability payments and winter fuel payments to pensioners. Reversing the two-child benefit cap in the Budget would cost another £3bn.
November 4: Reeves took the unusual decision of holding a pre-Budget speech and press conference at Downing Street. The implicit message was that tax rises were coming and the public needed to brace for higher income tax. “What I want people to understand ahead of the Budget is the circumstances we face,” she said. “All will have to contribute.”
We now know that this pitch-rolling for income tax rises — a major breach of the Labour manifesto — was happening while the public finances were tight but the shortfall compared to March was relatively modest.
November 06: After weeks of speculation across Fleet Street about an income tax rise, The Times newspaper reported that it would rise in the Budget.
November 13: Late in the evening, the Financial Times revealed that Reeves and the prime minister had dropped the plan to increase income tax, prompting gilt yields to leap the next morning.
November 14: Bloomberg first reported a briefing that the income tax policy was dropped because the economic forecasts had improved at the last minute, with a fiscal deterioration of £20bn rather than £30bn. The FT reported the same figure that day, citing government officials, and quoted a senior official as saying: “I won’t deny politics was a factor.”
The OBR has now revealed that the changes in its forecasts since October 31 had solely been driven by government policy proposals.
November 26: Budget Day. The OBR’s Budget commentary — including Reeves’ tax changes — was accidentally leaked 50 minutes before the chancellor began to speak in the House of Commons, after a Reuters reporter guessed the website URL for the report. Ministers were furious, while one senior Labour MP demanded Hughes’ resignation.
Reeves announced £26bn of tax rises, mostly to fund increases in welfare spending and to double the “fiscal buffer”.
November 28: A letter from the OBR’s Hughes to Dame Meg Hillier, chair of the Treasury select committee, set out the “evolution of our forecast between early August and Budget day”. The letter, which demonstrated that there had been no fiscal black hole, prompted an angry backlash from opposition MPs.
The letter was intended to “set out the facts” about the evolution of the OBR’s forecast in light of “the unusual volume of speculation on the subject prior to Budget day”, Hughes wrote.
“I consider it appropriate to provide the committee with some limited details from earlier forecast rounds in order to address any potential misconceptions about them,” he added.
Hughes is due to appear before the Treasury select committee on Tuesday, where he will doubtless face further questions about how the briefing war unfolded.
