Governments Must Curb Borrowing to Challenge OBR’s Influence

The Office for Budget Responsibility (OBR) has become a focal point of criticism from both left and right political factions in the UK. Recently, commentators have noted that if governments disapprove of the constraints imposed by OBR forecasts, they should consider running a budget surplus instead of relying on borrowing.

Critics from both sides have emerged, viewing the OBR as an obstacle to their political ambitions. The right perceives it as a powerful entity that supports traditional Treasury views, opposing tax cuts aimed at stimulating growth. Conversely, the left argues that the OBR was conceived under former Chancellor George Osborne to restrict the fiscal flexibility of left-leaning governments.

Statements from both extremes highlight a shared concern over the forecasting capabilities of the OBR. Politicians claim these forecasts limit their ability to implement policies effectively, forcing them into tax increases or reversals of proposed tax cuts based on projected outcomes.

While these critiques contain elements of truth, eliminating the OBR would likely exacerbate fiscal challenges, compelling the government into more stringent measures to maintain credibility in the bond markets. The OBR’s assessments heavily influence investor confidence, with markets responding negatively to perceived fiscal mismanagement.

The case of former Prime Minister Liz Truss illustrates the consequences of sidelining the OBR. Truss’s administration faced severe backlash when it disregarded established fiscal principles, leading to soaring gilt yields and a swift loss of confidence among investors. Initially campaigning against substantial government spending, Truss’s first act as Prime Minister involved announcing a £200 billion energy support package, a stark contrast to her earlier promises.

The situation underscores the importance of fiscal discipline. Truss’s approach did not expand her financial flexibility; instead, it severely restricted her options. The pressure from the OBR loomed over subsequent Chancellors, who have had to navigate the complex landscape of fiscal forecasting.

Historically, Chancellors have approached borrowing differently. For instance, during George Osborne‘s tenure, the emphasis was on eliminating the deficit rather than maximizing borrowing limits. This proactive stance allowed for substantial headroom—approximately £80 billion—making OBR forecasts less critical.

To effectively diminish the OBR’s influence, future governments may need to adopt a more conservative fiscal approach. Rachel Reeves recently highlighted a revised budget that saw a reduction of £9.9 billion, illustrating the challenge of managing public finances under the watchful eye of the OBR.

Ultimately, the path to reducing the OBR’s relevance is straightforward: governments should aim to run a surplus. By prioritizing fiscal responsibility, they can weaken the OBR’s grip on economic policy. If spending is consistently kept within sustainable limits, the OBR’s forecasts would lose their significance, allowing for greater autonomy in decision-making.

In this context, the conversation surrounding the OBR is a reminder of the delicate balance governments must maintain between fiscal policy and market expectations. As political factions continue to grapple with the implications of the OBR, the underlying message remains clear: prudent management of public finances is crucial for long-term economic stability.