Something fiscal this way comes: Reeves haunted by ghosts of Truss and the OBR
Haunted by the legacy of Truss and bound by the warnings of the OBR, Chancellor Rachel Reeves now faces a political and fiscal tragedy of her own, as internal rebellion and economic risks threaten her grip on stability, says Helen Thomas
OBR, OBR, wherefore art thou OBR? The three letter acronym that oversees government finances has hung over Gilt markets like Banquo’s ghost ever since they were butchered by the dagger of Lady Truss. If the OBR portends doom, the markets might take fright, forcing the government from office.
Or at least that is the story that Rachel Reeves has taken from the events of the last three years. Ever since becoming Chancellor, her every act has been to ensure the OBR determines her fiscal rules have been met, fearing if they were to rule otherwise then she herself would be made redundant. The welfare reforms tightening the criteria for Personal Independence Payments were a large part of the measures announced at the Spring Statement that ensured the OBR passed her with flying colours. Now that they’ve been removed from the gutted Welfare Bill due to a significant Labour rebellion, she’s slipped back into the red zone:
No wonder she is in tears at the tragedy she feels has befallen her, particularly given it was inflicted by her own side. Gilt markets are once again wobbling, having been made aware that the government now faces a biting political as well as fiscal constraint. The Chancellor cannot please both her party and Gilt investors. Net spending cuts are now off the table and tax rises will be unable to fill the gap without weighing down on growth. Such is the difficulty of life when debt is 100 per cent of GDP.
Toil and trouble
And now the OBR have popped up again with their latest annual fiscal risks and sustainability report. Usually a technical document that troubles only the geekiest of economic spreadsheet lovers (such as your author), this time round the OBR decided to deliver their ominous warnings with an accompanying press conference. Chair Richard Hughes was flanked by two senior members of the Budget Responsibility Committee, ex-Bank of England MPC member David Miles and former Treasury civil servant Tom Josephs. Bubble, bubble, toil and trouble, they incanted as they revealed the extent of risks upon which the UK economy now perilously teeters. Pensions, net zero and the mysterious Persnuffle (Public Sector Net Financial Liabilities) warranted a deep dive into the entrails of the British body politic, each one revealing a nasty vulnerability. These were but three risks from the three technocratic witches that could cause serious problems for the country’s fiscal position; the Hecatic Hughes pointed out that there were 50 other risks also lurking on the risk register. Since 2023, ‘Only nine have decreased and one has been resolved’. He concluded his presentation with the sobering remark ‘Given the frequency and severity of the shocks that the UK economy and public finances have experienced in recent years, any appreciation of the fiscal outlook… needs to take account of the inevitability of at least some of these risks materialising’.
The very fact that we have the transcript of the Chair’s remarks, his slides and the full presentation online demonstrates that the OBR is very keen to get its message across. As Richard Hughes put it in the Q&A, given reasonable assumptions for the future, “the UK public finances are in an unsustainable position in the long run… The UK cannot afford the array of promises that it has made to the public”.
This should be a clarion call to politicians of all stripes. The OBR is not the protagonist; the independent body does not desire or need to be cast as hero or villain once the history books are written. But it would like everyone to know that it did its job of warning what could happen if the leading characters fail to take action. The UK is “in a vulnerable position” so it is even more dangerous to operate with “very small margins” of headroom in a world full of risk.
With Reeves in the Chancellor hot seat ahead of an inevitably combustible autumn Budget, she can dictate whether tragedy or comedy unfolds. She has acknowledged her part goes beyond a simple spreadsheet, telling the Guardian last week, “I’m not going to apologise for making sure the numbers add up. But we do need to make sure that we’re telling a story, and a Labour story”. And a Labour story that is also a credible story for the markets is not within the gift of the OBR to bestow.
Helen Thomas is CEO and founder of Blonde Money