Reeves prepares to clip the wings of the almighty OBR
The shadow chancellor seeks to reframe UK’S fiscal rules to prioritise growth, reports Melissa Lawford
Rachel Reeves is not keen to draw comparison with Liz Truss, whose “growth plan” triggered a market panic in autumn 2022 and rapidly made her Britain’s shortest serving prime minister. But despite once attacking Truss for “unfunded and uncosted commitments that crashed the economy”, the shadow chancellor shares more with her former opponent than either might like to admit.
Like Truss, she also wants to champion economic growth. And like Truss, a close reading of her plans suggests she is acutely aware of the challenge posed by the Chancellor’s fiscal rules, which are policed by Britain’s fiscal watchdog, the Office for Budget Responsibility (OBR).
Unlike the former PM, however, Reeves is attempting to fight the body’s growing power by setting up a counterweight in the Treasury – with a focus not on the balanced financial forecasts of the OBR, but on increasing GDP itself. In a lecture at Bayes Business School yesterday, Reeves announced a plan to “hardwire” economic growth into Britain’s budget and spending review processes.
To do this, she will give new powers to the Treasury’s Enterprise and Growth Unit (EGU). Under a Labour government, for the first time, the EGU would be given a role in the chancellor’s fiscal and spending planning process. Reeves argues that this will “enshrine that core growth mission within our economic architecture”. Whether it is enough to overcome Britain’s bias towards inaction remains to be seen.
The OBR was set up by George Osborne, chancellor at the time, in 2010 to hold government to account on its fiscal targets and assess whether the public finances were on sound footing.
In its early days, the office was widely seen as a political stunt intended to prevent future Labour PMS from launching debt-fuelled spending sprees. But it has evolved over time into an institution whose word is taken as gospel by markets and whose verdicts can lead to a Budget being lauded as a triumph or written off as a disaster.
Critics believe that the body is now so strong, its cautious approach has left chancellors unable to unveil radical reforms that could ultimately save the economy from stagnation.
“We have this crazy set-up where these guesses about big numbers in four or five years’ time influence policy decisions today. Before we had these stupid fiscal rules, policies were dictated by your economic judgment and so it was a far more sensible outcome,” says Gerard Lyons, senior fellow at the Centre for Policy Studies.
“What Reeves is saying is we need to boost growth – and implicitly there is a problem with how the institutional framework works, and she wants to change it.”
Truss attempted to beat the system by totally bypassing it, immediately sacking Sir Tom Scholar, the most senior civil servant in the Treasury, and foregoing an OBR review of measures in her mini-budget. Markets took fright and she lasted for just weeks as a result.
Reeves has instead announced plans for a major reform of the system aimed at making it work in harmony with her objectives. The shadow chancellor has said she plans to give the OBR more legal status and says she will introduce a new requirement for the OBR to analyse the long-term impact of investment measures for growth.
Reeves says she will stick with the existing fiscal rule to get debt falling as a share of GDP. She will set out new
‘Before we had these stupid fiscal rules, policies were dictated by your economic judgment’
rules pledging that a Labour government will only borrow to invest, and will make sure that day-to-day spending is covered by revenues over a first Labour term.
The OBR will continue its job of marking government’s homework but the shadow chancellor hopes to change the mark scheme by relying on the EGU. Involving it in the fiscal planning process will give a chancellor more power to make a case to the OBR for policy measures that target growth, says Simon French, managing director at Panmure Gordon.
This could involve changing the criteria that policies are measured against, or placing greater weight on the value of boosting growth when the OBR assesses policies, says French. The market implosion that followed the September 2022 mini-budget was not because Truss misdiagnosed the problem but how she approached it, French says. “She had absolutely diagnosed the problem correctly,” he says. “The UK has too little growth.”
Britain fell into a technical recession at the end of last year, defined as two consecutive quarters of negative GDP. Across the entirety of 2023, the economy grew by just 0.1pc, according to the Office for National Statistics. Part of Britain’s growth problem is rooted in the fact that the Treasury is caught in the middle between two forces, says French. It wants to generate growth but it must also balance the books. “When push comes to shove, the accounting approach tends to win out,” he says.
The OBR does analyse the Government’s fiscal policies in terms of what they mean for growth. In its March economic and fiscal outlook, for example, the OBR calculated that the Chancellor’s measures would bring 200,000 workers into the labour force. But strengthening the EGU could give growth targets more precedence in the OBR’S assessments, says French.
Will a shake-up of the system not spook markets, as in the wake of the Truss mini-budget? French argues they will be relaxed.
“They won’t be stressed one little bit, because if you do things in a credible, systematic, transparent, logical way, you will have far more wiggle room,” he says.