Rachel Reeves is looking for scapegoats and the OBR is an easy target

Telegraph

24-03-2025

Rachel Reeves is preparing for another blame game.
The Chancellor has become an expert at pointing the finger at somebody else when seeking to explain Britain's high borrowing and tepid growth rate.
First, it was the Tories, who left a £22bn 'black hole' in public finances. Then it was regulators who had stifled growth and strangled businesses with red tape. Now, it's Donald Trump's fault for imposing global trade tariffs and shaking up geopolitics.
'The world has changed and across the globe we are feeling the consequences,' Reeves said this month after official figures showed the economy shrank at the start of the year.
On Wednesday, the Chancellor will make the argument again when the Office for Budget Responsibility's (OBR) slashes its growth forecasts in half. Ostensibly she will blame the changing world – i.e. Trump – for Britain's woes.
But a growing number of backbenchers and Labour faithful believe it is the so-called fiscal rules set by Downing Street and policed by the OBR that are really to blame. Tight restrictions and an unyielding OBR are forcing her to manage the purse strings more like a Tory chancellor than a Labour one, critics argue.
Labour's instinct has always been to tax and spend or borrow more when it comes to making the sums add up. Instead, Reeves is overseeing £5bn of welfare cuts, axing tens of thousands of civil service jobs and slashing up to £2bn in the Government's running costs by 2030.
Her shake-down of Cabinet colleagues to make the sums add up has not gone down well, with some unprotected departments outside of health and defence already facing deep real terms cuts after 2026.
Pressure is now building on Reeves to reassess her borrowing rules as well as the power of their ultimate arbiter, the OBR.
Lord Blunkett, the former home secretary, believes the fiscal rules must change. Speaking to the BBC last week, he branded them 'Treasury orthodoxy and monetarism at its worst'.
In her letter of resignation as development secretary, Anneliese Dodds expressed despair that Downing Street had taken an axe to the foreign aid budget rather than considered borrowing more. Dodds said she thought there should have been a conversation about 'our fiscal rules and approach to taxation' as opposed to allowing aid to 'absorb the entire burden'.
Andy Haldane, touted as a possible Labour appointment as governor of the Bank of England, once Andrew Bailey leaves in 2028, has called for a fundamental rethink of who runs some of Britain's most powerful institutions.
Writing in the Financial Times, he blamed Reeves's 'quick-fire ideological conversion to Treasury orthodoxy' for 'imperil[ing] both growth and her own standing'.
He warned that the 'upper echelons of many Whitehall departments, the Bank of England, the Office for Budget Responsibility and the regulators are stacked with ex-Treasury implants', including both Richard Hughes and Tom Josephs, two of the OBR's senior officials, who both had long careers at the Treasury.
However, Reeves will be reluctant to challenge the OBR after what happened to Liz Truss. The former prime minister sidelined the body in 2022 when she pressed ahead with her mini-Budget of £45bn of unfunded tax cuts – a move that ultimately led to her downfall.
Reeves has insisted that Labour will not repeat Truss's mistakes, introducing a 'fiscal lock' that will mean politicians can no longer bypass the OBR's scrutiny when setting policy.
She repeatedly championed the OBR's independence while in opposition, claiming in 2023 that strengthening – rather than weakening – the watchdog's powers would 'bring security back to our economy and prevent a re-run of last year's chaos'.
'When the Conservatives crashed the economy, mortgages and rents soared as interest rates rose. We can never let that happen again,' she said.
Reeves has since changed the Tories' two main debt rules. The Government is now required to balance the books for day-to-day spending and get a wider measure of debt down that excludes investment spending by the end of the decade. The Chancellor may now be ruing those decisions.
Having freed up billions of pounds to spend less than six months ago, the Chancellor will admit on Wednesday that she has already broken at least one of her self-imposed targets.
Reeves now finds herself with so little fiscal headroom that policymaking has become as much about convincing the unelected OBR about the merits of certain policies than the value of the policies themselves. What the OBR will or won't 'score' as a measure that increases growth and jobs has come to influence whether policies are taken forward in the first place.
Adam Smith, Jeremy Hunt's chief of staff between 2022 and 2024, recalls that the then chancellor was prepared to pump hundreds of millions of pounds into funding for musco-skeletal disorders and obesity programmes. The Treasury summoned Chris Whitty, the former chief medical officer, to meet the OBR's top brass and say the money would boost employment.
'This didn't work,' says Smith. 'They wouldn't score anything positive so we didn't provide any of this funding.'
Critics of Labour's welfare reforms say the party's decision to cut benefits payments was a crude measure designed to ensure the OBR would account for it in its forecasts.
Stepping back though, it's important to remember who sets the rules in the first place. Reeves's predicament is ultimately self-inflicted.
In her October Budget, the Chancellor chose to borrow tens of billions of pounds more every year to pump into public services, leaving her with less than half the average buffer left by previous chancellors to cushion against economic shocks.
Of course, she could follow in the footsteps of her predecessors and rewrite the rules again. Research by the Institute for Government shows the UK has changed its rules much more frequently than any other country in the G7 and has the shortest average duration of its fiscal rules internationally.
But this would be another embarrassing blow for a Chancellor who is likely to have to raise taxes again in the autumn as the economic backdrop darkens.
Future tax cuts could well be blamed on the OBR. Analysts have long warned that the watchdog has consistently been too optimistic about Britain's growth prospects. It believes productivity growth will rise to 1.2pc by 2029, up from the average of 0.6pc in the decade after the financial crisis. Most observers simply don't see this as realistic.
A 0.5pc change in annual productivity growth could reduce or raise borrowing by around £40bn a year by the end of the decade, the OBR has said. That would be enough to reverse all the tax increases Reeves announced at the Budget, showing just how costly the OBR's overly optimistic attitude could prove.
The watchdog traditionally does a thorough stock take of its forecasts each summer. The forthcoming one may decide the Chancellor's future.
David Miles, an official at the OBR, highlighted the importance of productivity growth a year ago, admitting that Britain's record was 'dismal by anybody's standards over a long time now'. At the time, he remained optimistic that Britain would get its mojo back, despite growing doubts in the City. 'I hope we're right,' he said.
Optimism is in short supply as Reeves's Spring Statement looms. The blame game is already starting and the Chancellor may well be tempted to suggest it is the spending watchdog that has restricted her hand.
Ultimately, though, it is Reeves who has laced the straightjacket on to herself.