Fiscal prudence? The iron chancellor doth protest too much
Rachel Reeves’ decision to expand the powers of the OBR suggests apprehension, not confidence, writes Tim Focas.
Rachel Reeves has promised to be an “iron chancellor” embodying fiscal constraint and discipline. Yet, her first legislative move to enhance the powers of the Office for Budget Responsibility (OBR) raises questions about her own confidence in living up to this tough fiscal image.
Reeves’s initiative to empower the OBR – with the introduction of a “fiscal lock” to ensure any major tax or spending announcement is subject to an independent assessment from the watchdog – is ostensibly aimed at preventing a repeat of Liz Truss’s disastrous “mini-budget”. Truss’s uncalculated tax cuts, announced without specifying offsetting spending cuts or revenue increases, came at the peak of the UK’s inflation crisis. Investors understandably interpreted these tax cuts as a signal that the Bank of England would need to raise interest rates more aggressively, exacerbating borrowing costs for both the government and the private sector.
In this context, the premise for creating a new watchdog may sound prudent, but it also raises a critical question: why does Reeves feel this need? An iron chancellor, after all, would never propose radical tax cuts without corresponding measures to maintain fiscal balance, making additional oversight redundant. The need for an empowered OBR thus suggests a lack of faith in her own ability to maintain fiscal prudence.
Lest we forget, the OBR was (ironically) originally established by a Conservative-led coalition government to ensure transparency and accountability in fiscal policy. Reeves’s move to bolster this body’s powers is arguably an attempt to reinforce Labour’s image of fiscal competence. However, it appears more symbolic than substantive. It aims to draw a stark contrast between the Labour administration and Truss’s government, leaning on the public’s pejorative memory of the mini-budget crisis to highlight Labour’s purportedly superior fiscal responsibility.
This strategy might provide Labour with a temporary political cushion, extending the government’s honeymoon period. It allows Reeves some breathing room to potentially implement a pro-growth policy agenda without immediately jeopardising public finances. However, it is crucial to recognise this empowerment for what it is: a political manoeuvre rather than a genuine fiscal safeguard.
Reeves, like her predecessors, will face significant fiscal constraints. The realities of the UK’s economic situation, including the need for sustainable growth and manageable debt levels, will limit her ability to enact expansive policies. Despite the political theatre, this so-called iron chancellor will soon have to make tough decisions that balance the need for economic growth with fiscal responsibility.
Ultimately, Reeves’s move to empower the OBR, while politically savvy, reveals a lack of confidence in her self-proclaimed image as an iron chancellor. If she were truly committed to fiscal constraint, there would be no need for additional watchdog oversight. This legislative action is a symbolic attempt to distinguish her administration from past failures, buying time to establish a credible policy agenda. The true test of her fiscal discipline will come when she faces the same classic tax vs spend barriers as her predecessors. As a former Tory chancellor George Osborne aptly put it on election night, “the very best of luck, she is going to need it”.
Tim Focas is the head of capital markets at Aspectus Group