When in opposition, Rachel Reeves claimed that “the Conservatives are gaslighting the British public“. When she became Chancellor, she insisted that she would not “gaslight” working people herself. This can surely now be added to the long list of broken promises.
The prolonged uncertainty ahead of the Budget had already harmed the economy. But confirmation that the markets and the public have been misled throughout the process will do more permanent damage to confidence in the government and in policy making.
We now know that there was never a giant “black hole” in the public finances. This is clear from the OBR’s detailed response to the Treasury Select Committee’s questions about the Budget process.
Here is the killer table with the key number marked.
Crucially, the final pre-measures forecast showed that the Chancellor knew at the end of October that the current balance was still projected to be in a small surplus of £4.2 billion, thus meeting the ‘deficit rule’. Even the worst set of forecasts, available on 3 October, showed a deficit of just £2.5 billion.
The Treasury has responded by briefing two new lines against the OBR – one just ridiculous, the other only slightly less so.
The first is to accuse the OBR of breaking Budget secrecy by publishing details of the forecasting process. This is breathtakingly hypocritical, but wrong anyway. Note that the material that should remain confidential was explicitly excluded from the OBR table above.
The second is to note that the £4.2 billion surplus figure in the final ‘pre-measures’ forecast did not include the £7 billion cost of the reversal of the previously announced savings on health-related benefits and winter fuel payments.
This is technically correct, but that is always how this process works. In any event, even if you added the £7 billion back in, the forecast deficit would only have been about £3 billion, not the £20-30 billion we had been led to expect. Above all, this should not distract from the reality that these were policy choices made by the government itself. You cannot really grumble that the true ‘black hole’ was bigger if that reflects your own failure to control public spending…
So what on earth explains the pitch rolling for manifesto-breaking tax increases in the now infamous “scene setter” speech on 4 November? That speech made a lot of the downgrade to the OBR’s assumptions about productivity growth. But it made no mention of the fact that the fiscal impact of that downgrade had already been offset by upward revisions for tax revenues, largely due to higher wage and price inflation and shifts in the composition of national income. This created the impression that the “black hole” was far bigger than it really was.
Ironically, Reeves could have told a much more positive and at least remotely defensible story from the outset, perhaps along these lines…
“The OBR’s new forecasts have confirmed that I have fixed the foundations. But now is the time to repair the roof. I will use this Budget to increase the fiscal headroom to protect against future shocks…”
But instead, she chose to frame the Budget is the worst possible light.
There was then the U-turn on the plan to raise income tax rates, first reported in the Financial Times on 13 November. This was attributed to “improved forecasts”, despite the fact that this made no sense even at the time and was very likely to be exposed later as a lie.
Only the most gullible would believe that this U-turn was not based on the political backlash and the need to save the PM.
I can only guess at what else was going on in the depths of the Treasury and No.10 over this period.
It is possible that the 4 November ‘scene setter’ was an attempt to be far too clever – leaving all options open, including the option of announcing on Budget day that Rachel Reeves brilliant management of the economy and public finances meant that tax rises were not needed after all.
Emphasising the productivity downgrade might also have helped when trying to blame for tax increases on the legacy of previous governments. There would at least have been some justification in this, though it is notable that the OBR has since said that nothing Labour has done was enough to move the dial in the opposite direction. It would presumably be too awkward to admit that the productivity downgrade had been offset by new forecasts suggesting that working people would pay even more tax.
Or perhaps the Chancellor was determined to raise taxes, come what may, in order to increase the fiscal headroom. This could be either for good reasons (a bigger buffer against future shocks, but then why not say so), or for more cynical ones (more scope for further spending or even tax cuts just before the next election), or some combination.
Some bright spark might also have thought it was a good idea to show that Rachel Reeves was still in charge of the Budget, despite the growing influence of Torsten Bell and No.10.
However, I doubt that that the 4 November speech was a deliberate attempt to manipulate the markets, as some have suggested, simply because the OBR’s ‘observation window’ for interest rate expectations and bond yields had already closed.
As for the explanation of the U-turn, the sheer stupidity of lying about the OBR’s forecasts suggests this was blind panic, perhaps based on old briefing lines. But whether coldly calculated or just a cock-up, any attempt to mislead the media, the markets and wider public is outrageous.
Moreover, the whole Budget stinks of “gaslighting”. Just a few more examples…
- Telling working people that extending the freeze on personal tax thresholds does not break the manifesto commitment not to increase taxes on working people even though you said last year that this would hurt working people…
- Telling people you have “cut the debt” when the OBR says the Budget will increase borrowing over the next three years by £5 billion on average and that debt will be around 1½% of GDP higher on average over the next five years…
- Telling the hospitality businesses who can *see* their rates bill jumping that their rates bill is not jumping because reasons…
- Telling people who will have less money to pay household bills because their taxes are going up that you have “cut the cost of living” (especially when inflation is still forecast to be higher for longer).
Some observers – myself included – have spent weeks pointing out the holes in the narratives coming out of the Treasury and No.10. Nonetheless, the scale of the deceit is still shocking. It is entirely reasonable to ask whether there have been any breaches of the Ministerial Code. And if someone had done this in the City, they would have been gone long ago.
Plain-speaking Economics 