The confected frenzy splashed across the morning front pages from the Telegraph to the Mail is remarkable mostly for its absurdity. An outrage machine has decided that a forecast of a few billion pounds in a model that makes projections about trillions of pounds of taxes and spending is the lie of the century. We can’t predict the weather next year, but apparently the public finances in 2029 can be judged with pinpoint accuracy. That’s why the headlines about “holes” and “sleaze probes” are a joke. It is theatre, but it is bad theatre.
The Office for Budget Responsibility (OBR) possesses no great moral or predictive authority. Yet many of its accusers and defenders treat it as an all‑seeing oracle. In fact, the OBR, to its credit, admits that its medium-term projections are frequently wrong. It often wrongly estimates inflation and productivity, and has had its assumptions upended by unforeseen events. The OBR’s 2019 five-year forecast undershot actual GDP growth by £200bn. Given this degree of error, treating a projected current budget balance of £20bn in 2029-30 as a hard fact is deeply unserious.
The government colludes in this fiction. Rachel Reeves wasn’t deceitful – just not candid. Sir Keir Starmer suggested that the OBR had been overzealous in assessing UK productivity once Labour arrived in power – as if civil servants had it in for the incoming government. As it turns out, the OBR has bigger problems than a “bemused” prime minister to deal with – like having a hackable website with market‑sensitive information. The watchdog paid the price – its chair fell on his sword.
Ms Reeves and Sir Keir embrace a fiscal rule that requires the current budget surplus in 2029-30 – a target that exists to soothe bond markets. Britain’s economy remains depressed, with a long-term trade deficit and low private-sector investment. Under these conditions, the government must by definition run a deficit – or else see rising unemployment and indebtedness. Pretending otherwise is a polite fiction for “the markets”. And markets, naturally, prefer more “headroom”: it implies less gilt issuance, which pushes up bond prices and pushes down yields. Their preference for austerity is laundered as fiscal rectitude when it is self-interest.
In contrast, Labour MPs don’t want public spending – or welfare – cuts and do want ways to tax wealth more effectively. This stance clashes with Ms Reeves’s self-imposed straitjacket. The government’s instability is because it has put itself between the instincts of its MPs and the demands of bond traders.
As this column has argued before, there are solutions. The government could reduce the interest bill that drives so much of the deficit. It could tax the banks’ windfall gains from higher rates, as the Liberal Democrats suggest. It could follow former central banker Paul Tucker’s advice and “tier” reserve remuneration, saving billions by cutting the interest paid on commercial banks’ balances, shrinking Threadneedle Street’s losses and reducing costs to the exchequer. It could take its cue from the New Economics Foundation and end the Treasury’s indemnity of the Bank’s quantitative easing losses – boosting Treasury coffers by £20bn annually.
These measures would improve the fiscal position without harming Britain’s social fabric. But they require a political imagination that this government has not yet shown. The next Labour leader might have enough of one to dispel the fear of the bond market that is paralysing politicians’ efforts to rebuild Britain.
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