How a Treasury trap set at Labor accidentally ensnared Kwarteng
Just days after receiving the keys to Number 11, George Osborne sought to dispel the temptation for future chancellors to ‘fake the numbers’.
Setting up the Office for Budget Responsibility just as Britain was emerging from the wreckage of the financial crisis, Osborne promised to “create a rod for my back and down the line for the backs” of his successors.
Some have speculated that the fiscal watchdog, created in 2010, was a trap to keep future Labor governments on track, but it has proven equally troublesome for Tory chancellors.
Now, the credibility of Kwasi Kwarteng’s budget plan is in the hands of the OBR. The forecasts due in the coming weeks will likely be the official forecaster’s most controversial projections to date.
The lack of official forecasts from the OBR is partly responsible for the markets’ fear of the Chancellor’s mini-budget last month. But Kwarteng has promised to provide a new OBR forecast when he presents his full budget plan on how to stabilize public finances on a date to be confirmed when parliament returns this week.
The first iteration of these new forecasts was presented to the Chancellor privately on Friday, giving Kwarteng time to revise its plans according to their severity.
Privately, some Tory MPs are critical of the watchdog’s forecast, saying it does not reflect the dynamic nature of the proposals put forward by the new prime minister. The projects are unlikely to provide a stamp of approval for Truss’ radical economic plan.
“The really important thing that the OBR brings is not the forecasting process or anything like that,” says Sir Charlie Bean, former Deputy Governor of the Bank of England and former member of the Budget Responsibility Committee of the OBR.
“They emphasize uncertainty. But what this brings is first of all impartiality. When forecasting was in the Treasury, there was an inevitable tendency to push things in the direction ministers wanted. I had seen it in the past.
OBR brings transparency and exposes “what’s going on under the hood in sometimes excruciating detail.”
“It’s valuable, not only for the general public and the markets, but also for Parliament.”
Jonathan Haskel, a Bank of England rates chief, underscored this on Thursday when he said the central bank relies on OBR data and projections to help it set up its own forecasts. .
Without the fiscal watchdog’s perspective, the Bank is partly flying blind at a time when additional government stimulus could have huge ramifications for inflation and hence interest rates.
“A sidelined OBR generates more uncertainty by worsening everyone’s information base,” Haskel said.
As the OBR was put in place by the cautious Osborne, tensions between the budget watchdog and two of the newest Tory chancellors have escalated.
Some on the right are complaining that the OBR is leaning left after the Resolution Foundation’s senior executive hires amid growing mistrust in conservative ranks of British institutions.
Richard Hughes, the leader of the OBR, was removed from the left-wing think tank after just a year there, but was appointed by Rishi Sunak when he was chancellor. Hughes also has a long career at the Treasury and the IMF, leading the latter’s fiscal affairs department when the Washington-based institution was the architect of austerity.
Nonetheless, reports suggested earlier this year that Sunak “viscerally hates” the OBR for tagging his work. The watchdog’s warnings that tax revenue would hit its highest level since Clement Attlee’s Labor government under Sunak’s plans caused headaches for the then Chancellor, possibly even reducing his chances of winning the Conservative leadership race.
Truss and Kwarteng also had a difficult relationship with the OBR. The Prime Minister has been on a collision course with British institutions since the leadership race where she promised to challenge economic orthodoxy with radical policies.