The next Prime Minister can change the conversation on the fiscal rules
Since the defenestration of Liz Truss, the OBR has become an obsession in British politics. It need not be this way. Independent fiscal institutions are supposed to inform politics, not rule it. Other countries use them as sources of transparency, not as judge, jury and executioner, says Helen Thomas
The next Prime Minister and Chancellor will face the same brutal arithmetic that has beleaguered Starmer and Reeves. The original sin of removing winter fuel payments offered a visible saving when, upon taking office, they chose to approve public sector pay rises whilst attempting to demonstrate fiscal discipline. Yet that one early decision had long-running ramifications. It framed the government as willing to impose pain on pensioners in the name of satisfying its fiscal constraints.
The next occupant of Number 11 will face similar trade-offs from the first moment they walk into Downing Street. But a fresh start does offer an opportunity: not to pretend the constraints have vanished, but to reframe what they are for.
It is perfectly possible to construct a different balance of tax, spend and borrow that still claims fiscal credibility. If higher public investment raises productivity, expands the tax base and improves long-term growth, then some of the borrowing may, in the jargon, “pay for itself”. The Office for Budget Responsibility would have to decide how much of that growth to recognise in its forecasts. Perhaps that is why Richard Hughes, the former OBR chair, has reportedly been advising Team Burnham, alongside the Labour peer and former Treasury minister Jim O’Neill. The latter suggested recently that “I don’t think you’d necessarily have to rip up the fiscal rules. I think you just need to be bolder about borrowing to invest.” Borrowing to fund day-to-day spending is distinct from borrowing for investment that plausibly raises the economy’s potential growth rate.
Financial markets do not need an independent fiscal authority to make up their minds. They can read the numbers for themselves
Yet here lies the danger. Financial markets do not need an independent fiscal authority to make up their minds. They can read the numbers for themselves. And yet, since the defenestration of Liz Truss, the OBR has become an obsession in British politics. A kind of institutional PTSD has taken hold whereby politicians have convinced themselves that pleasing the OBR is synonymous with keeping their jobs.
It need not be this way. Independent fiscal institutions are supposed to inform politics, not rule it. Other countries use them as sources of transparency, not as judge, jury and executioner.
The Netherlands is the best example. Its CPB Bureau for Economic Policy Analysis has, over decades, become embedded in election campaigns. Political parties can submit their manifestos for independent analysis before voters go to the polls. The CPB then estimates the consequences for the budget, debt, growth, employment and income differentials. It does not “approve” manifestos. It does not tell voters which party is right. It gives the electorate a common set of numbers against which political promises can be judged.
Australia has a similar, though narrower, model. Its Parliamentary Budget Office provides independent, non-partisan costings of policy proposals and election commitments. Parties can use it confidentially before an election, with costings published during the campaign process. The emphasis is less on modelling the whole economy, as in the Netherlands, and more on whether a particular promise has been properly priced.
Both systems show there is nothing inherently dangerous about independent fiscal scrutiny. Quite the opposite. Done well, it improves the quality of democratic argument. It forces politicians, and perhaps more importantly voters, to confront trade-offs before they enter office, rather than discovering them in a panic afterwards.
A cautionary tale
Fiscal rules are supposed to help this process, showing commitment in order to improve a government’s credibility. Germany has its constitutional debt brake. Sweden has long operated with expenditure ceilings, a surplus target, a debt anchor and external monitoring. New Zealand’s framework rests more on transparency and principles of responsible fiscal management than on a single hard numerical rule. Different models reflect different political cultures, but the similar purpose is to stop governments pretending there is no budget constraint.
The German debt brake, however, is also a cautionary tale. Friedrich Merz comes from a party for which fiscal discipline is part of its backbone and he campaigned on that inheritance. Yet within weeks of last year’s election, faced with a transformed security environment and doubts about America’s commitment to European defence, he performed an astonishing U-turn. Defence spending above one per cent of GDP was carved out of the debt brake, alongside a vast infrastructure fund.
Merz considered the issue so urgent that less than a month after winning the election he pushed the reforms through the outgoing Bundestag before the newly elected parliament had even taken its seats. Once the new chamber convened, the combined strength of the AfD and Die Linke would have given them a blocking minority over constitutional change.
The political reward for his gamble has been limited. The far-right AfD has since overtaken the CDU/CSU in several polls, while Merz has become one of the most unpopular German chancellors of the post-war era. Fiscal flexibility may have been strategically necessary, but it did not magically restore political authority.
That is the lesson for Britain. Fiscal information, independent scrutiny and credible rules can all be valuable. They educate politicians, markets and voters about unavoidable choices.
But when rules are gamed to destruction, or when watchdogs are treated as sovereign rather than analytical bodies, the framework loses legitimacy. The aim should not be to worship the OBR, nor to abolish discipline. It should be to restore a democratic argument about priorities, trade-offs and growth.
The next Prime Minister will not escape the arithmetic but they will at least get the chance to change the conversation.
Helen Thomas is founder and CEO of Blonde Money