The chair of the UK's fiscal watchdog, the Office for Budget Responsibility (OBR), Richard Hughes, resigned from his post on Monday. His departure comes amid a fierce political debate over the reliability of the OBR's long-term economic forecasts and the government's self-imposed fiscal rules.
The Theatre of Fiscal Forecasting
The resignation follows a period of intense scrutiny, where projections about the nation's finances have been treated with what critics call an unwarranted certainty. The OBR itself acknowledges its medium-term forecasts are often inaccurate, having previously undershot actual GDP growth by a staggering £200bn over a five-year period. Despite this inherent uncertainty, a projected current budget balance of £20bn for the 2029-30 financial year has been seized upon as a definitive fact in political discourse.
This focus, described by some as a "theatre of errors," obscures the broader reality. The watchdog has also faced practical challenges, including concerns over a hackable website containing market-sensitive information. Hughes's decision to "fall on his sword" is seen as a direct consequence of these mounting pressures.
A Government Trapped Between Two Masters
The core of the issue lies in the government's precarious position. Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have committed to a strict fiscal rule requiring a current budget surplus by 2029-30. This target is widely viewed as a mechanism to reassure bond markets and maintain economic credibility.
However, this commitment clashes with the instincts of many Labour MPs, who are opposed to further cuts in public spending or welfare and advocate for more effective taxation of wealth. Simultaneously, the UK economy continues to face significant headwinds, including a long-term trade deficit and depressed private-sector investment. Economists argue that under such conditions, the government running a deficit is almost a necessity to avoid rising unemployment and personal indebtedness.
The government's current instability stems from attempting to navigate between the demands of its parliamentary party and the expectations of international bond traders. The latter naturally prefer greater fiscal "headroom," which reduces gilt issuance and supports bond prices, a preference often framed as fiscal rectitude rather than market self-interest.
Potential Solutions Beyond Austerity
Commentators suggest several alternative measures could improve the fiscal picture without resorting to austerity that could harm the social fabric. These include taxing banks' windfall profits from higher interest rates, a policy suggested by the Liberal Democrats.
Other proposals involve reforming how the Bank of England operates. One idea from former BoE official Paul Tucker is to "tier" reserve remuneration, saving billions by not paying interest on all central bank reserves held by commercial banks. Another, from the New Economics Foundation, suggests ending the Treasury's indemnity of the Bank's quantitative easing losses, which could boost Treasury funds by an estimated £20bn annually.
These solutions, however, require a degree of political imagination and boldness that the current government has not yet demonstrated. The hope expressed by some is that a future administration may find the courage to move beyond a paralysing fear of the bond markets and pursue a more imaginative strategy for rebuilding the British economy.
