Fiscal Woes Mount for Chancellor Rachel Reeves as OBR Downgrades Forecasts

Strategic Insights -

Chancellor Rachel Reeves has been presented with a stark reality check as the Office for Budget Responsibility (OBR) admitted to repeatedly underestimating government borrowing and overestimating economic growth. This comes as Reeves attempts to navigate a near £5bn fiscal hole created by the government's decision to abandon welfare reform. The OBR's "forecast evaluation report" revealed that its forecasts have consistently been too optimistic, leading to a 3.1% of GDP underestimate of government borrowing over a five-year horizon.

Key Takeaways:

  • The OBR's forecast evaluation report found that government borrowing has exceeded official forecasts by an average of 3.1% of GDP over a five-year horizon.
  • The OBR overestimated GDP growth, with actual growth minus the forecast for each year made five years earlier ranging from -0.5% to -1.5%.
  • Chancellor Rachel Reeves' economic strategy relies on OBR forecasts, which have been repeatedly too optimistic, leaving her exposed to forecast downgrades.
  • Labour MPs are pushing for the scrapping of the Conservative-era two-child benefit cap, which would cost the Treasury an additional £3.4bn.
  • The government's £9.9bn of "headroom" allowed by Reeves in her Spring Statement is at risk of being burned through by policy changes, including the welfare U-turn and potential tax rises.
  • Efforts to maintain good relations with Donald Trump, such as scrapping the digital services tax, could lead to renewed pressure on the UK to ditch its equivalent tax, which is on track to yield £1.2bn a year for the Treasury.
  • The UK may face a further hit from a G7 agreement that carves US multinationals out of a top-up corporation tax deal, which could yield £1.5bn a year by the end of the parliament.

Statistics:

  • The OBR's forecast differential over five-year periods has ranged from -0.5% to -1.5% in actual growth minus the forecast for each year made five years earlier (Source: OBR).
  • The OBR has under estimated government borrowing by an average of 3.1% of GDP over a five-year horizon (Source: OBR).
  • The welfare U-turn is expected to cost the Treasury an additional £1.25bn, while scrapping the two-child benefit cap would cost an additional £3.4bn (Source: Article).
  • The government's £9.9bn of "headroom" allowed by Reeves in her Spring Statement is at risk of being burned through by policy changes (Source: Article).
  • The digital services tax is on track to yield £1.2bn a year for the Treasury (Source: OBR).
  • The G7 agreement that carves US multinationals out of a top-up corporation tax deal could yield £1.5bn a year by the end of the parliament (Source: Article).

Sources:

  • Office for Budget Responsibility (OBR)
  • Article, no date
  • Survation poll, no date
  • RBC Capital Markets, no date
  • Treasury, no date
  • City of London figure, no date
  • Chancellor Rachel Reeves, no date