Reports suggest that Nigel Farage would scrap the Office for Budget Responsibility if he became prime minister. Fair or not, this will be read as a signal that Reform UK doesn’t care about controlling budget deficits. If Farage wants to terrify bond markets — sending gilt yields spiking every time his polling improves — he couldn’t choose a better policy.
Why invite that turmoil? I don’t worship the OBR, nor think the UK’s fiscal credibility hinges on a 15-year-old quango. But Britain’s economic problems clearly aren’t due to an independent watchdog producing forecasts and assessing the government against its own budget targets. Any fiscal problems we have stem from the rules that successive governments have asked the OBR to monitor, not the OBR existing.
Take Rachel Reeves’s rules. She’s committed to balancing the non-investment budget within three years and lowering a measure of debt relative to GDP by year five of the OBR’s forecast. On paper, that sounds prudent. In reality, it’s lax. Debt can rise for four years, so long as it falls in year five. Tight spending plans to achieve balance in the day-to-day budget get pushed off to two years’ time. The Institute for Government calls these “some of the loosest fiscal rules a UK government has had”.
Bond markets have woken up to the deceit of such rolling targets. When Labour reversed planned welfare cuts, investors sold off gilts. One fund manager said the U‑turn “sets fire to your credibility in a world where there is increasing focus on solvency”. This isn’t a new problem. Britain has cycled through eight sets of fiscal rules premised on getting debt falling since 2010, yet debt has risen from 65 to 95 per cent of GDP.
The problem with our rules isn’t that they are too tough, or a “straitjacket”, as the Labour MP Louise Haigh claims. It’s that, because they hinge on speculative growth estimates, they generate uncertainty and volatility. Look at Reeves’s spring statement. The OBR revised down future growth, wiping out her “headroom” against the rules. So she scrambled to tighten policy and rebuild the margin. As the Institute for Fiscal Studies put it: “Forecast volatility feeds through almost one-for-one into policy volatility.” As a result, the OBR looms over politics, with constant speculation about how the next forecast will affect tax and spending decisions.
If Farage wants to break this loop, there’s a better way than abolishing the OBR: stop basing our fiscal rules on forecasts. Instead, why not use hard data and anchor government spending to what the Exchequer can sustainably raise? Take the average tax receipts over the past four years, adjust them up for inflation and population growth, and use the result as your annual spending cap. This ensures that spending is smoothed around the trend in government revenues.
If there’s a genuine emergency — a war, a recession — parliament could override the cap, but unexpected borrowing should lead to commensurate lower spending caps, spread over the following five years. Now that’s a framework with teeth.
This rule has major advantages. It is tough: spending cannot consistently outrun revenue, so the budget tends towards balance and debt-to-GDP declines. It is predictable: departments and households can plan without fear that the OBR’s forecast changes will trigger sudden tax hikes or spending cuts. And it encourages honest budgeting: if you want to spend more, you must first raise taxes and let revenues bed in.
Yes, shifting to this particular spending cap would require immediate tough cuts. A more achievable version of the principle — tying spending ceilings to a multiple of past tax receipts — could easily be introduced in Reform UK’s first term, however. This is assuming Farage cares about the debt, of course. If critics are right that he seeks the OBR’s abolition to borrow lots more, then markets will punish him, whether the watchdog exists or not.