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Unaccounted for spending would bust Chancellor’s debt rules, says OBR chief

The Chancellor would break his fiscal rules “by a country mile” if he took into account likely increased spending on defence and a continued fuel duty freeze, according to the fiscal watchdog chief.

Richard Hughes, chairman of the Office for Budget Responsibility (OBR), said the UK Government’s fiscal framework was becoming “increasingly gamed” as ministers announce “aspirations” for spending without setting out detailed timeframes for delivering on them.

The lack of specifics means they cannot be included in independent economic forecasts handed to the Treasury but “hang over” them and “act as a risk to the achievement of Government objectives”, he said.

The OBR forecast, published alongside Wednesday’s Budget, found Chancellor Jeremy Hunt had given himself only a £6.5 billion buffer in order to meet his fiscal rule of having debt falling as a proportion of the size of the economy in five years’ time.

Mr Hunt had used the autumn statement in November to relax the UK Government’s existing fiscal rules, pushing back the debt target by 24 months to 2027-28.

Mr Hughes said that “even with two years of extra time” and slightly better growth and employment prospects, the Chancellor was “still struggling to meet that fiscal rule”.

About £4 billion of the £6.5 billion headroom is linked to increasing fuel duty – something no chancellor has done since 2011.

Mr Hughes indicated that the political likelihood of fuel duty remaining frozen in the next Budget, which is likely to come only months before a general election, and Prime Minister Rishi Sunak’s ambition to spend 2.5% of GDP on defence, could blow a hole in the Chancellor’s debt target.

Budget graphic
(PA Graphics)

“There is a list of things that aren’t in our forecast which could easily wipe that headroom out tomorrow,” he said at a post-Budget briefing organised by the Resolution Foundation think tank on Thursday.

“If you combine fuel duty, his aspirations on where he wants the tax regime on businesses to go, and also the aspirations announced earlier on this week about defence spending – and getting it to 2.5% of GDP – when you combine those things, that busts his rules by a country mile.”

He said there were “more and more illusions” being built into the fiscal outlook due to the lack of defined spending plans being announced.

“Governments are finding new ways of gaming these rules,” he continued.

“The new game is to announce an aspiration but then say, ‘I’ll only get there when my resources allow’.

“Well, your resources don’t allow so why are you announcing these things?”

He was joined in his assessment by Paul Johnson, director of the Institute for Fiscal Studies (IFS), who accused the Treasury of an “inevitable fiscal sleight of hand” when it came to including the fuel duty escalator in its workings.

“The pretence that fuel duties will always rise next year, when they never rise this year, is becoming increasingly wearisome,” the think tank boss told a briefing on Thursday.

“It makes a bit of a nonsense of the fiscal forecasts.”

Downing Street said the Prime Minister remained “committed” to meeting the debt-cutting target and indicated the fuel duty escalator could continue to be accounted for in the headroom figures.

Mr Sunak’s official spokesman said: “The Government’s position has not changed and we will make a decision on what is in the best interest of the UK in the future, but I can’t comment on what decisions we may take.”

OBR chief Mr Hughes rejected suggestions that his organisation held any sway on Budget decisions through its monitoring of the Chancellor’s commitment to fiscal rules.

“Chancellors choose their fiscal targets and how much headroom they want against those fiscal targets,” he said.

“If he wanted a different set of targets, he could have announced a different set of targets. If he wanted more headroom, he could have made other fiscal choices which gave him more headroom.

“He didn’t do either of those things.”

Meanwhile, Mr Hughes confirmed Mr Hunt engaged with the forecast-setting process more than his predecessors, meeting with the OBR four times ahead of Wednesday’s announcements compared with the one or two occasions that had been the norm for previous Treasury chiefs.

Mr Hughes said more engagement with the Chancellor was “very welcome” as separating the forecast and the policy creation process meant there was a risk of a “disconnect between the two”.

It comes after the former chancellor, Kwasi Kwarteng, and former prime minister Liz Truss came under fire after failing to work with the OBR on an assessment ahead of their mini-budget announcement that caused an economic fallout last autumn.

Mr Hughes rejected criticisms of some right-wing politicians about the influence of the OBR’s forecasts, saying: “The idea that we are some arbitrator of the Government’s policy choices or have a veto on them is just nonsense.”