Office for Budget Responsibility chair Richard Hughes has told MPs there is a strong argument to require non-emergency fiscal events to be “based on and presented alongside an up-to-date economic outlook” from the organisation.
His views came in a Treasury Select Committee session looking at the autumn’s rollercoaster events sparked by former PM Liz Truss and ex-chancellor Kwasi Kwarteng’s disastrous mini-budget, which spooked financial markets and cost the pair their jobs.
Notoriously, Kwarteng and Truss did not request an OBR forecast to inform their 23 September mini-budget, also called the Growth Plan 2022, which contained £45bn of unfunded tax cuts.
At yesterday’s select committee session, OBR chair Hughes was asked whether there should be a change to the drafting of the organisation’s remit to ensure that fiscal events of all kinds – whether or not they are formally described as “budgets” – are accompanied by a forecast.
“I think it is a good principle of fiscal policymaking that major fiscal decisions should be based upon and presented alongside an up-to-date economic outlook,” he replied.
“The law says we have to publish two updates a year, and one of them has to accompany the budget.
“But the law also says that it is for the chancellor to decide when our forecasts are published, and it was for that reason that, despite the fact that we had forecasts ready at the time, because the chancellor did not ask us to publish them they remained confidential advice to ministers.”
Hughes told MPs the OBR had been informed on 7 September – the day after Truss became prime minister – that neither she nor Kwarteng required a report to accompany their planned mini-budget.
Asked whether there had been any discussions with the chancellor and prime minister about how dangerous that strategy might be, Hughes replied that there had been “no discussions” with Kwarteng or Truss before the mini-budget was delivered on 23 September.
The then-PM and chancellor did meet Hughes the following week, however, after the Bank of England was forced to make an emergency intervention to stabilise the bond markets and prevent the collapse of some categories of pension fund.
MPs asked Hughes what lessons there were to be learned. He suggested that while it had to be acceptable for the government to make fiscal changes without OBR reports in emergency situations, it should not be the norm.
“One can’t be too critical of specific instances because there were cases like in March of 2020, my predecessor had just produced a forecast and then the pandemic hit,” he said.
“Shortly after that, Rishi Sunak, when he was chancellor, announced the furlough scheme. I think it was perfectly legitimate that he needed to move at pace. We then worked very quickly to produce an updated forecast as the basis for the next round of decision making. You obviously don’t want to wait for us if you’ve got to get something in place like the furlough scheme and people are facing losing their jobs.
“But there have been other instances where essentially discretionary fiscal policy decisions have been made without forecasts: the health and social care levy and the health settlement alongside it was an example.”
Rewriting fiscal rules
MPs also quizzed Hughes on the regularity with which successive chancellors have broken their own fiscal rules. Jeremy Hunt amended the current incarnation of the fiscal rules in last week’s Autumn Statement.
“We seem to be moving to a system where fiscal rules are a guide for fiscal policymaking at the time, rather than something that, ex-post, you can hold them to account for having met,” Hughes said.
“That was originally the case when chancellors were on track to meet their targets and then they broke them and they didn’t do anything about it and then they set a new set of targets after an election. So the timetable for fiscal-policymaking and the timetable for political decision-making weren’t particularly well-aligned.”
Hughes said there was “nothing wrong” with a system where fiscal rules were used a guide for fiscal-policymaking.
“It just means you put a lot of weight on the forecast to tell you whether you’re on track, rather than on the ONS to tell you in outturn data whether you’re on track,” he said.
Hughes added that there was an argument for reassessing fiscal rules when the nation’s economic outlook changed significantly.
“It’s been a period of extraordinary volatility over the past few years,” he said. “We’ve had a pandemic, we’ve now got an energy crisis. You would probably need to do some quite perverse things with fiscal policy in order to meet your fiscal targets in those kinds of contexts.”