3 days ago
Labour MPs tell Rachel Reeves: Don't rely so much on OBR forecasts
Rachel Reeves should stop relying so heavily on the fiscal watchdog because its forecasts are not a 'crystal ball', a group of Labour MPs has said.
The chancellor is under pressure to reduce the influence of forecasts from the Office for Budget Responsibility (OBR) over tax and spend decisions.
The Red Wall caucus of more than 40 Labour MPs has backed calls to 'adjust the way we report and respond to forecasts' and to 'stop treating single-point estimates as gospel'. The MPs also backed calls to cut the forecasts produced by the OBR from two to one a year.
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Andy MacNae, MP for Rossendale & Darwen in Lancashire, said the OBR provided only a 'rough guide' as to where the economy might be in four years. 'But the OBR has never claimed to have a crystal ball and we shouldn't treat it as if it does,' he said.
MacNae pointed to a report from the forecaster in 2023 in which it admitted its 'central forecast' number 'has virtually no chance of being correct'.
In March the OBR downgraded the economic effect of Labour's welfare plans before the spring statement, leading to last-minute cuts to benefits totalling £500 million.
The following month Sir Keir Starmer criticised the watchdog for the assessment, saying he 'personally struggles' with the way it drew up its forecasts. The prime minister later dropped the reforms to disability benefits after a backbench rebellion.
Reeves has indicated that she would consider adopting a different approach to the OBR. This month she said she was 'looking at how the OBR works', adding: 'The International Monetary Fund has made some recommendations about how to deliver better fiscal policymaking and obviously I take those seriously.'
In May the IMF said the chancellor should move down to one OBR estimate each year, which it said would prevent the government from responding to short-term market demands for more cuts or tax rises.
According to the OBR in March, Reeves recorded £9.9 billion in 'fiscal headroom' — the flexibility in a government's financial plans. The IMF said moving away from the twice-yearly assessment would 'de-emphasise' the importance of the headroom in policymaking, as well as bring the UK into line with other countries.
Jo White, the MP for Bassetlaw, Nottinghamshire, who chairs the Red Wall caucus, said: 'To deliver on national renewal we need policy and fiscal stability and the OBR has a vitally important role to play in that.
'Fine-tuning policy to fit a central estimate that we know will be inaccurate is not the way to do that. To recognise the value of the OBR, we must acknowledge their limitations.'
Labour strengthened the OBR's powers in the Budget Responsibility Act, one of the first laws passed after the election. This was designed to reassure the markets that Labour would not act like Liz Truss, the former prime minister who bypassed the OBR when she and Kwasi Kwarteng, her chancellor, held a mini-budget.
Any softened approach to the watchdog risks spooking the markets and making government borrowing more expensive, one government source said.
However, others close to Reeves believe tweaks to the OBR's treatment would be accepted by the markets as necessary.
