Is Rachel Reeves breaking up with the OBR?
Morning Wire’s City Editor, Simon Hunt, unpicks the stories that get the Square Mile talking
Rachel Reeves will do anything to keep the Office for Budget Responsibility (OBR) on side. Or so we thought.
The chancellor made a number of last-minute changes to her Spring Statement to ensure her fiscal headroom stayed on target, including cuts to disability benefits. Many suspect she will do whatever necessary to avoid a mini-budget style market shock and keep the fiscal watchdog’s growth forecasts heading in the right direction.
But now, a fork in the road. Reform’s storm to victory at the local elections has sparked tougher rhetoric from the government on immigration. It’s now up to Reeves to square the circle and figure out how to fit migration policy changes within her fiscal rules.
According to OBR modelling from last year, new migrants tend to pay more in taxes than the average Brit due to the greater probability of their being economically active. They also pay thousands to the exchequer in visa fees, while for the first five years following their arrival they are not eligible for most benefits. In other words, says the OBR, new migrants increase general tax revenue while leaving levels of public services spending “largely unchanged” and “therefore deliver a net reduction in borrowing” of around £7.4bn.
Indeed, the OBR projected that public sector net debt as a share of GDP could be as much as six per cent lower under a high immigration scenario than with low immigration – a variance which could upend even a lax fiscal buffer, let alone a wafer thin one.
But does the government agree? Its new Immigration White Paper coyly refers to migration analysis as being “highly sensitive to alternative assumptions” – hinting at a divergent modelling approach to the OBR’s.
“Such a Trumpian nod to “alternative facts” must be another subtle effort to flattery through imitation,” quips Panmure Liberum chief economist Simon French.
PM Keir Starmer said the “experiment” of high migration “was over”. “Today this Labour government is shutting down the lab,” he said. But is also this the start of a new experiment, one of pushing the boundaries of OBR forecasting? Is this the start of a whole flurry of “alternative assumptions” from the Treasury or is this as far as Reeves can countenance demurring from the OBR?
One likely outcome is the OBR will revise its public sector borrowing forecasts to accommodate policy changes from the white paper – revisions which won’t make Reeves’ life any easier. There had already been a steady drumbeat of investor worries that the chancellor would have to hike taxes even further to keep within her already-precarious fiscal rules. That is now reaching a crescendo.
How ambitious is the Mansion House Accord?
Three cheers for the signing of the Mansion House Accord by Britain’s biggest pension funds.
The pact, under which at least ten per cent of funds will be invested into private markets, of which at least five cent in the UK by 2030, was described as “ambitious” by the Treasury.
But the careful phraseology of the agreement would suggest it’s a little less ambitious than it might have been.
The accord’s five per cent target is “subject to fiduciary duty and the Consumer Duty”; “assuming a sufficient supply of suitable investible assets for providers” and “dependent on implementation by government regulators of critical enablers.”
In other words: terms and conditions apply. It almost seems as though pension funds had one eye to a scenario of missing the 2030 target, and were preparing to point the finger elsewhere to save face. We would have loved to pour billions into investible UK assets, they will say, if only we’d found some.