The UK's fiscal watchdog, the Office for Budget Responsibility (OBR), has publicly challenged the Treasury's narrative surrounding Chancellor Rachel Reeves's last-minute decision to scrap a planned income tax increase in her recent budget.
A Clash of Accounts
In an unusual move, OBR chair Richard Hughes wrote to the Treasury select committee to clarify the timeline of economic forecasts, directly contradicting briefings from Treasury sources. These sources had claimed the decision to ditch the income tax rise was made because of more favourable OBR predictions, which suggested a smaller fiscal adjustment was needed.
However, the OBR's letter includes a detailed chart showing that by the third round of forecasts, delivered to the Chancellor on 31 October, the improved figures were already apparent. This was over a week before Reeves and Prime Minister Keir Starmer reportedly abandoned the tax plan on 13 November.
The Budget Timeline Unravels
The political drama began building before the budget, with Reeves delivering an early morning speech on 4 November that was widely seen as preparing the ground for a breach of Labour's manifesto pledge on income tax. She repeatedly refused to deny that rates would be increased.
The situation shifted when the Financial Times reported the policy U-turn. In response, Treasury insiders briefed that the change of heart was due to better-than-expected inflation and wage growth data from the OBR, making the tax rise unnecessary to meet the government's fiscal rules.
Yet the OBR's evidence reveals that by 31 October, Reeves was already projected to meet her first fiscal rule with £4.2 billion to spare. The watchdog confirmed that no significant changes were made to its economic forecasts after this date.
Broader Tensions and Next Steps
This dispute highlights the fraught relationship between the Treasury and the independent OBR. Chancellor Reeves had previously criticised the timing of the OBR's productivity forecast revisions over the summer. She has also expressed frustration that the watchdog does not incorporate the government's pro-growth policies, such as its reset with the EU, into its forecasts.
The controversy is set to continue, with Richard Hughes scheduled to appear before the Treasury select committee on Tuesday. He is expected to face questions not only on what the Chancellor knew and when, but also on the results of an inquiry into the OBR's accidental early online release of its budget documents.
Despite the OBR's detailed letter, Treasury sources firmly reject any contradiction, arguing that a final decision could only be made after the OBR had provided forecasts that incorporated the full impact of all planned budget measures on economic growth.
