Former OBR chair takes aim at Rachel Reeves’ fiscal rules
The former chair of the Office for Budget Responsibility has taken aim at Chancellor Rachel Reeves’ fiscal rules, suggesting they prevent UK public finances from building enough “resilience”.
In his first public appearance since his resignation last month due to the leaked Budget, Richard Hughes said the current fiscal rules were “among the loosest” the country had ever had.
He suggested the UK had struggled to build “fiscal resilience” from economic shocks, including routs in bond markets, due to Reeves running a budget deficit of around 5 per cent of GDP.
Hughes’ comments stood in stark contrast to demands from some Labour backbenchers and union bosses to increase government expenditure and overhaul the fiscal framework to offer the Treasury more leeway over public finances.
They also appeared to be in direct opposition to Reeves’ own justifications for hiking taxes, with the Chancellor claiming economic blows from President Trump’s trade war and a productivity downgrade by the OBR forced her hand last November.
“Fiscal rules that we now have in place are amongst the loosest that the UK has had in its history,” Hughes told Lords on the Economic Affairs Committee.
“I don’t see much element of the government being constrained in its ability to support the economy at the moment.
“If anything, the rules we have at the moment are providing the government the capacity to run a quite significant structural deficit.”
Hughes bemoans ‘constant excuse’ in fiscal rules
Hughes also criticised the short lifespans of fiscal rules set by eight different Chancellors since 2010 and the “rolling nature” of Reeves’ fiscal rules, which means the government never has to immediately meet its financial objectives.
Reeves’ rules dictate that the current budget should be in surplus on a rolling five-year basis, which is set to be reduced to a three-year forecast period from 2027.
Debt and borrowing rules allow governments to back-date tax rises, with economists highlighting a two-year extension on stealth taxes from 2028 as being a feature of the rule.
Hughes said rolling targets, which were also used by successive Tory Chancellors, allowed governments to find a “constant excuse” to loosen fiscal policy before committing to instant spending cuts or tax rises.
“[The current rules] do very little to rebuild fiscal resilience at a time when we are now getting on to four years since the last major shock which hit the UK,” he said, referring to the energy crisis in the fallout of President Putin’s full-scale invasion of Ukraine.
“We are at a significant fiscal disequilibrium despite the fact that we have moved on quite a bit.”
Reeves’ small headroom
His statement during the hearing echoed views shared by former Bank of England Governor Mervyn King in the House of Lords last year.
King said: “Although the OBR discusses risks to the outlook several years ahead, it presents just one precise number to which the chancellor is supposed to respond, and it does so every six months. This is no way to manage public spending.
“We owe it to our grandchildren to take seriously the challenge of reducing the national debt.”
Hughes also said Reeves and other Chancellors had put public finances under more pressure from building in small levels of headroom against the OBR’s near-£50bn forecasting error margin.
The ex-Whitehall official began the hearing by reading out a statement apologising to the parliament and the government for the leak of the Budget around an hour before Reeves stood up in the House of Commons.
He said the OBR had gained trust because it held itself to “higher standards” and admitted to making mistakes.
Hughes also said an exchange of letters uncovering the size of Reeves’ headroom during the forecasting period in the run-up to the Budget were published to remove a “damaging impression about the professionalism and integrity of the OBR”.