Chancellor Rachel Reeves has been accused of overstating the damage to the UK's public finances from a downgrade of economic growth by the Office for Budget Responsibility (OBR). The Treasury's independent forecaster revealed that the outlook for the economy was rosier than Reeves had led everyone to believe.
In June, the Guardian reported that revised OBR forecasts would blow a £20bn hole in Reeves' tax and spending plans. The OBR was uncomfortable with estimates of productivity growth dating back to 2010 that had proved too optimistic. Reeves was reportedly angry about the downgrade but used it to signal a tougher spending review.
The National Institute of Economic and Social Research (NIESR) later estimated the shortfall at £40bn, worse than the rumoured £20bn. Richard Hughes, then OBR chair, sent a confidential note to Reeves stating the OBR would cut its productivity growth forecast by 0.3 percentage points, reducing annual growth forecasts from 1.8% to 1.5% over five years and lowering tax receipts by £16bn.
However, Hughes' letter also noted that higher inflation and wages would offset the productivity downgrade. The OBR's preliminary forecasts included higher inflation, which boosts VAT receipts, and higher wages, which increase income tax and national insurance payments. Despite this, Reeves highlighted only the productivity downgrade in public statements, omitting the offsetting factors.
The OBR's final forecast on 3 October showed the government's current balance target would be missed by £2.5bn. To maintain a £10bn buffer, Reeves needed to raise about £12.5bn through tax rises or spending cuts. Opposition calls for her resignation have grown since the OBR clarified the economic outlook was better than she had suggested.
