‘We don’t know’ how Chancellor will make budget spending plan add up, says OBR
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The head of the UK’s official forecaster has warned that “we don’t know” how the Government will make its spending plans add up amid concerns over a lack of detail from last week’s Budget.
Richard Hughes, chair of the Office for Budget Responsibility (OBR), told MPs at the treasury select committee that it is “difficult” for the fiscal watchdog to accurately forecast the outlook for public finances as a result.
It comes around two months after Mr Hughes said spending forecasts in November’s autumn statement were beyond “a work of fiction”, in a scathing criticism of the support received from the Treasury.
On Tuesday, he said there is longer-term information about tax but that spending information runs out next year.
“There continues to be an imbalance between how much detail we have of the Government’s tax plans, which support their objective of getting debt falling in five years’ time, and the amount of detail we have about its plans for departmental spending, which makes up 40% of total public spending,” Mr Hughes said.
“We know the Government’s plans for National Insurance, we know the Government’s plans for energy taxation in five years’ time.
“But what we know about Government’s plans for spending on public services runs out after March of next year.
“It’s still lacking in detail, and difficult for us as forecasters to forecast, difficult for people to understand where the public finances are going, and it poses risks.”
Last week, the Chancellor announced a 2p reduction in National Insurance as part of a key Budget ahead of this year’s general election.
The forecaster said proposed tax cuts would be partly financed by some reductions to spending as well as a fall in fiscal headroom – the state’s buffer to meet fiscal rules – from around £13 billion to £8.9 billion.
On Tuesday, the OBR stressed that the Chancellors budget “only just” met fiscal rules and still faces “significant risks”.
Mr Hughes said: “The Budget was responsible in terms of the objectives the Chancellor has set for himself – in five years to get debt to begin to fall in share of GDP (gross domestic product).
“However, it does that with one of the narrowest margins any Chancellor has had against his fiscal targets.
“It’s the second narrowest of £9 billion and the very narrowest was this time last year.
“It’s meeting those fiscal targets, but only just.
“There are significant risks to the fiscal outlook weighing on that margin, not least the ones that are very likely to crystallise, such as fuel duty being frozen rather than indexed.”
The fiscal headroom room would be halved if the Government ultimately freezes fuel duty – as it has done every year for the past decade – and wiped out completely if it meets a commitment to increase defence spending to 2.5% of GDP, the OBR said.
The forecaster said this could be offset by spending cuts, but that it does not yet know where these might be made.
Mr Hughes said: “The have a workforce plan for the NHS, they have commitment to grow defence spending in line with GDP, they have commitments to grow overseas aid spending in line with GDP.
“They have ambitions in some areas to go even further.
“How they make that add up with the rest of Whitehall departments, we don’t know.”
Giving evidence later in the day, Torsten Bell and Paul Johnson, the heads of the Resolution Foundation and Institute for Fiscal Studies think tanks, both aimed criticism at the current fiscal rules.
At present, if debt as a proportion of GDP rises every year for four years, and then falls slightly from the fourth to the fifth year, debt will be higher, but the Government can still say it met its fiscal rules.
“It’s bizarre because it’s just about debt coming down in the fifth year of the forecast period,” Mr Johnson told MPs. He added that without the fiscal rules the Chancellor might have used the public purse for more pre-election giveaways.
Both men said that there are different ways to create a better system. Mr Johnson called for a “more qualitative rule,” where the Chancellor says the aim is to get debt down in the medium term, and the OBR says whether they think the direction of policy is consistent with that.
Mr Bell said: “In terms of the actual fiscal rules themselves, the five-year focus is definitely silly.”
He added: “In normal times, if you think that the goal is to have debt falling … you need a rule that basically requires you to have debt falling in every year outside of a recession and the recovery from that recession, not just five years out, because that’s a rule to never have debt falling.
“The fact that the consensus in British politics is that we should focus fiscal rules in ways that don’t take any account of the difference between investment and current spending is causing us big problems.
“That’s why whenever a downturn happens, or just bad news happens, we cut public sector investment. That’s what’s going on now. That is definitely bad for the country in the long run, we’re definitely moving into a phase when we have to be investing more, rather than less.”
Mr Bell mentioned environment and defence as two such examples where people want to see more public investment.
