“This is no way for fiscal policy to operate. Not only has the Chancellor had to find £15 billion in savings in a relatively short amount of time based on a changing economic forecast, but she had to tweak her plans to find extra money based on disagreements between the OBR and Treasury on the fiscal savings from her Welfare reforms.

It is not immediately obvious why OBR’s judgment is considered law. A team of roughly 30 career economists, with very little evident expertise in policy evaluation in particular, the OBR is undoubtedly capable of high-quality economic and fiscal forecasts, but no more than many others, including the Treasury.

Indeed, looking at OBR’s latest Forecast Evaluation, its error for net borrowing in 2023-24 was £11.2 billion compared to the forecast in March 2023, including a £38.8 billion error for receipts and a £2.6 billion error for NICs receipts alone. This is not to denigrate the quality of OBR’s forecasts, but a reflection of how hard it is to be highly accurate given the economy’s fluid and multifaceted nature.

Therefore, it seems incredibly unwise for the Chancellor to adjust welfare spending plans, which would potentially have profound consequences for hundreds of thousands of people, based on the difference in calculations, which could pale in comparison to the forecasting error. While the OBR’s standing is now legal, changes should be made to the way that forecast uncertainty is reflected and how it impacts fiscal headroom. This is especially important if we can ever reach the promised land of one fiscal event a year.

This is not to say that the Chancellor should not be looking for cost savings. Given that public sector productivity remains some 8% lower than pre-pandemic levels – based on increasingly unreliable labour market data at least, it seems imperative that she does so. Indeed, the government has announced seemingly well-considered plans to improve productivity in recent weeks, which will take time to implement and benefit from. This compares to the second round of rushed and potentially painful savings found due to changing fiscal forecasts.

Nor is the Chancellor absolved of criticism. She once again left herself less than £10 billion headroom by the end of the forecast period. Given that a similar figure was more than wiped out in the space of just six months, Rachel Reeves has left herself vulnerable to being put in the same position in the near future.  She is at least becoming more urgent in her attempts to decrease public spending, for instance bringing forward a pot of funding to support public service reformation.

Finding improvements elsewhere is tough for the government, given they need to get the OBR to agree on the merits of the policies for it to be baked into their forecasts of fiscal headroom. In this regard, the tail is now wagging the dog. The celebratory tone from the Chancellor when discussing the rare success in getting OBR to agree on the growth benefits of her planning reforms reflects this. The OBR and Treasury should work together to improve the former’s policy costing expertise and allow for more speculative pro-growth policies.

The government also announced more spending on defence, a necessary move given the changing geopolitical climate. While it may seem ill-timed for this to happen during a time of such acute fiscal difficulty, it will at least support growth somewhat, given that defence spending is seen to be associated with higher multipliers than most other areas of public spending. Indeed, the details of the extra spending suggest the government is looking to get bang for its buck. Decreasing aid spending to deliver this might be counter-intuitive if the UK becomes vulnerable to more significant external threats as a result.”

– Christopher Breen, Head of Economic Insight