Watchdog fears Chancellor will use more conjuring tricks to balance nation’s books
- OBR warns Chancellor against using smoke-and-mirrors accounting tricks
- Watchdog highlights number of ‘fiscal illusions’ she could ‘exploit’
- Budget has pushed 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 swipe at the Chancellor, the powerful watchdog has highlighted a number of ‘fiscal illusions’ she could be tempted to ‘exploit’ under new debt rules that would weaken the public finances.
Reeves’s Budget has pushed borrowing costs to their highest level in a year as investors give her package the thumbs-down amid growing concerns that it was neither credible nor affordable.
The OBR’s warning is particularly striking because it has come under heavy fire from the Tories. Shadow chancellor Jeremy Hunt accused the watchdog of pro-Labour bias for publishing its reports into Reeves’s claims she uncovered a £22billion black hole in the public finances at the same time as the Budget.
Reeves used the OBR report to blame her huge tax rises on her predecessors. However, although the OBR found that Treasury officials did not share information about £9.5billion of pressures on departmental budgets, it did not criticise Hunt or other Tory ministers.
Ms Reeves’s plans for an extra £32 billion a year borrowing binge have also raised fears that mortgage costs will stay higher for longer.
Traders still think the Bank of England will cut interest rates this Thursday by a quarter of a percentage point to 4.75 per cent but they have pushed back expectations of any further easing until early next year.
It follows a fierce row between Reeves and her predecessor, Jeremy Hunt, whom she accused of covering up a £22 billion ‘black hole’, which he dismissed as ‘absolute nonsense’.
The intervention by the OBR is especially embarrassing for the Chancellor after she insisted her increase to employers’ National Insurance Contributions was not a tax increase on workers, a claim met with widespread derision by business leaders.
Amid claims by the Conservatives that she was ‘fiddling the figures’ 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 investment as well as the cost, giving the Chancellor more spending leeway.
But the move still left Reeves with just £16 billion of room to manoeuvre under her debt rule if things did not go to plan – a figure the OBR called ‘very low’.
Some of that ‘headroom’ has already been wiped out as borrowing costs have soared since the watchdog’s forecasts were finalised. This means more tax rises on top of the £40 billion unveiled last week are likely.
In its Budget report, the OBR sounded the alarm over the new debt rules, which it said created ‘different risks and policy incentives’ from the old ones. These include the Government issuing ‘low quality loans’ that might not be repaid, investing in ‘risky assets’ and shifting pension costs off its books.
The watchdog said it had calibrated its forecasts for the UK economy to try to ‘minimise the potential illusion’ – in other words, it felt the need to take account of the fact Reeves might indulge in sleights of hand.
About 12 per cent of loans worth £9 billion made by the new National Wealth Fund are expected to turn sour, it added.
It noted that public sector pension liabilities for the likes of doctors and teachers worth £1.3 trillion – or almost half the UK’s annual economic output – still do not appear on the state’s balance sheet.
Reeves has put in ‘guardrails’ to ensure investments deliver ‘good value for money’. But experts are sceptical, saying this is the latest in a string of changes to how debt is measured.
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