The leak of the budget may be the least bad thing the Office for Budget Responsibility has done to this chancellor. Rachel Reeves was visibly infuriated by the fact the OBR had published its report on the budget online before she had even got to her feet and delivered it in parliament – a delivery, incidentally, that was assured, passionate and politically pointed, and restored confidence in her leadership of the Treasury.
Looking back on the past three sorry months that have brought an embattled chancellor and a worried country to this budget, however, the OBR has much to answer for.
It was created, after all, by George Osborne in order to make sure the bond markets have confidence that the Treasury’s numbers can be trusted. But the back and forth from the OBR on economic forecasts has had the opposite effect: in recent months, there has been growing speculation of a UK debt crisis, and even the possibility of the chancellor having to go cap in hand to the International Monetary Fund for a bailout.
In the event, the OBR estimated that the UK's debt requirement was set to be only £6bn greater than expected in 2029-30. This was not the £20bn-plus hole in the national finances that had been bandied about, which would have left a £40bn hole to be filled to cover the debt (£20bn) and provide a buffer to reassure the bond markets (£20bn.)
The cost of that fearmongering has been greater than the price of the budget. Consumer confidence has been damaged. Business investment has been on hold. The housing market has been frozen. One generation has been gifting assets to another. All this ahead of a budget that was not as radical or as swingeing as predicted, thanks, largely, to the reports of OBR forecasts over the past three months.
Standing back, there is something absurd about the way British budgets are now made: the chancellor is forced to make both economic and political calculations, based on OBR forecasts of tiny variables in future growth, spending and borrowing – estimates that everyone knows cannot possibly prove to be right.
The budget has proved, then, to be a much more muted political event than forecast. It defines Keir Starmer and Reeves more for what they haven’t done, than what they have – not radical reform of the tax system; not a long overdue look at council and property tax; not a generational shift in benefits by dealing with the triple lock; not a promise to reform the welfare system.
Pain elsewhere will be deferred, but it will come, especially for savers who hoped they were cushioned against adversity
If people thought the budget would be the defining political moment of the year, it wasn’t. That remains the U-turn on welfare reform. Once again, the government has shied away from the big decisions. Without tackling welfare, pensions or property, the UK has little reason to believe it will turn the page on poor growth.
Without more candour and courage on Europe, there is little hope of reversing a long-term slump in trade and investment. A new study led by economists at Stanford University says UK GDP is 6-8% lower than it would have been but for Brexit. Investment is 12-18% lower. Employment and productivity are 3-4% lower.
Instead of confronting these structural challenges, the government has stored up political problems for 2028 and beyond. There will be no new council tax band for high-value homes, but from April 2028 there will be a levy on those worth more than £2m. Income tax thresholds, already frozen to 2028, are now frozen for another three years. By 2031 one in four taxpayers will pay the higher rate.
Pain elsewhere will be deferred, but it will come, especially for savers who hoped they were cushioned against adversity. It will come in the form of increased tax on dividend income from 2026 and on savings income from 2027. The tax-free allowance for cash ISAs will be capped then too – and almost halved – and national insurance relief on pension income will be capped from 2029.
Reeves and Starmer have bought themselves time. They have crafted a budget that gives rivals less reason to challenge them next year – but only because the political outlook for Labour thereafter looks even bleaker than it does now. Absent a sharp uptick in growth, the economic inheritance for a Wes Streeting or an avenging Angela Rayner looks unappetising.
And there’s the rub. “Growth” earned a mention early in Reeves’s speech but it was as if she didn’t dare return to it, having staked her economic strategy on growth last year and failed to deliver. Employers will be quick to point out raising the minimum wage – by about 10% for 18-to-21-year-olds and 5% for over 21s – may help young people with the cost of living but at the cost of slower hiring.
This is a government that came to power on a wave of weariness after Brexit, Covid and successive failed Conservative administrations. It promised a national overhaul funded by productivity improvements. Reeves and Starmer will be hoping those improvements materialise in time to save their joint project. They could. Neither the OBR nor the Treasury know whether they will.
The OBR’s forecasts change all the time, and ministers are mesmerised by them, like tennis fans. This is no way to run an economy. Apologising for the pre-Budget leak, Richard Hughes, the OBR’s chair, did not rule out resigning. That would solve nothing. The problem with the OBR is not who runs it but how ministers defer to it. That in turn is a function of the wafer-thin margins of a borderline economy.
What the UK needs is a robust growth strategy based on fundamental welfare reforms and radically improved trading relations with Europe – and a cabinet that sticks to it.
Photograph by Kirsty O'Connor / Treasury