Is Reeves heading for a fiscal car crash?
Rachel Reeves has a deep respect for officialdom and institutions and was aghast at the way Liz Truss simply ignored the Office for Budget Responsibility when putting together her doomed ‘mini Budget.’
Cast your mind back to the early days of the Truss administration (which, as it turned out, weren’t very far from the final days) and you’ll remember the confidence with which certain Tory MPs dismissed the OBR as not fit for purpose.
It was, they said, part of an economic ‘orthodoxy’ that was too rigid and too unwilling to consider dynamic modelling of policy choices and supply-side reforms. So dismissive were they, that Truss and her chancellor Kwasi Kwarteng pushed ahead with their mini Budget without including the OBR forecasts that traditionally accompanied such occasions.
It turns out Reeves wasn’t alone in considering this to be a reckless move, and the rest is history. In the aftermath of the Truss collapse, Reeves led the charge to strengthen the OBR’s authority. During the election campaign, she would talk about the watchdog as if it enjoyed God-like authority.
In reality, its own leadership downplays their powers of economic forecasting, with deputy director David Miles referring to their function as “a sat-nav not an oracle.” The question now facing Reeves is whether the OBR sat-nav is about to see her veer off the road.
After the October Budget, with its tax rises and spending splurge, Reeves was left with just under £10bn of so-called fiscal headroom. Economists fully expect that figure to have disappeared thanks to a combination of higher borrowing costs and low growth. This means the government will face calls in the Spring to either increase revenue (tax hikes) or slash government spending.
The books must balance.
She’ll never say it, but Reeves must now at least understand the Conservative critique of the OBR’s methods. The watchdog won’t take into account any of the far-off pro-growth measures announced by the government any more than it will take into account a Chancellor’s optimistic tone of voice.
Reeves has boxed herself in, meaning she’ll either have to break a manifesto commitment not to raise taxes on working people (remember them?) or she’ll go to war with her own party as the spectre of austerity returns to Westminster. Strap yourselves in for a bumpy ride ahead.