Table of Contents
- OBR warns Chancellor against using smoke and mirrors accounting tricks
- The control body highlights the number of “fiscal illusions” that could be “exploited”
- The budget has raised borrowing costs to their highest level in a year
That’s magic: The OBR has warned Rachel Reeves against using smoke and mirrors accounting tricks
The independent Office for Budget Responsibility (OBR) has warned Rachel Reeves against using smoke and mirrors accounting tricks to balance the nation’s books.
In an extraordinary blow to the Chancellor, the powerful watchdog has highlighted a series of “fiscal illusions” which could be tempted to “explode” under new debt rules that would weaken public finances.
Reeves’ budget has raised borrowing costs to their highest level in a year, as investors reject his package amid growing concerns that it was neither credible nor affordable.
The OBR’s warning is particularly surprising because it has come under intense attack from conservatives. Shadow chancellor Jeremy Hunt accused the watchdog of pro-Labour bias for publishing its reports into Reeves’ claims that he discovered a £22bn black hole in the public finances at the same time as the Budget.
Reeves used the OBR report to blame his predecessors for their huge tax rises. However, while the OBR found that Treasury officials failed to share information about £9.5bn of pressures on departmental budgets, it did not criticize Hunt or other Conservative ministers.
Reeves’ plans for a further £32bn-a-year borrowing overhang have also raised fears that mortgage costs will remain high for longer.
Traders still believe the Bank of England will cut interest rates this Thursday by a quarter of a percentage point to 4.75 percent, but have pushed back expectations of any further easing until early next year.
It follows a fierce dispute between Reeves and his predecessor, Jeremy Hunt, whom he accused of covering up a £22bn “black hole”, which he dismissed as “absolute nonsense”.
The OBR’s intervention is especially embarrassing for the Chancellor after she insisted that her increase in employers’ National Insurance contributions was not a tax increase on workers, a claim that was widely mocked by business leaders.
Amid claims from the Conservatives that he was “rigging the numbers”, Reeves replaced the old way of measuring debt with a broader definition called public sector net financial liabilities, or PSNFL. This includes counting the benefits of the investment as well as the cost, giving the Chancellor more leeway to spend.
But the move still left Reeves with just £16bn of room to maneuver under its debt rule if things did not go as planned, a figure the OBR called “very low”.
Some of that “wiggle room” has already been eliminated as borrowing costs have soared since the watchdog’s forecasts were finalized. This means there are likely to be further tax rises on top of the £40bn announced last week.
In its Budget report, the OBR sounded the alarm about the new debt rules, which it said created “different political risks and incentives” from the previous ones. These include the Government issuing “low-quality loans” that may not be repaid, investing in “risky assets” and removing pension costs from its books.
The watchdog said it had calibrated its forecasts for the UK economy to try to “minimise potential wishful thinking”; In other words, he felt the need to take into account the fact that Reeves might fall into sleight of hand.
Around 12 per cent of the £9bn worth of loans granted by the new National Wealth Fund are expected to turn sour, he added.
It noted that public sector pension liabilities for doctors and teachers worth £1.3 trillion – or almost half of the UK’s annual economic output – still do not appear on the State’s balance sheet.
Reeves has put up “guardrails” to ensure investments offer “good value for money”. But experts are skeptical and say this is the latest in a series of changes to the way debt is measured.
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