It was the absence of the Office for Budget Responsibility’s judgment that was blamed for the bond market crisis after Liz Truss’s mini-Budget. Truss and her chancellor Kwasi Kwarteng had rushed to enact their vision for a fast-growing economy without waiting for the wisdom of the government’s official fiscal watchdog. For Truss, the OBR is just another part of the establishment that was out to get her.
But then, can the OBR be entirely trusted anyway? It seems that it has created a black hole of its own making – by overstating Public Sector Net Financial Liabilities (PSNFL). PSNFL is the measure that Rachel Reeves has chosen to use for her new fiscal rules – preferring it to the measure previously used because it flatters, slightly, the government’s balance sheet. It doesn’t exactly wipe out the national debt, but it takes into account extra assets, making it appear that the government is a little less indebted than it otherwise appears. That allows Reeves to borrow a little more and still claim that public debt will be falling as a percentage of GDP by the end of this parliament – her holy grail.
But when you are living on a fiscal cliff, as Rachel Reeves is doing, it helps to have some accurate data. The OBR has had to admit, in a footnote to its report accompanying the October Budget, that it got PSNFL wrong in March. The result is that, going into this budget, Reeves should have been able to look to ‘fiscal headroom’ in 2028/29 – the extra amount she could borrow before bumping her head on the ceiling created by her fiscal rules – of £62 billion. This mysteriously came down, after corrections, to £43.9 billion – a black hole of £18.1 billion. But here is where it gets a bit dicey. Reeves’s budget measures bring down her fiscal headroom to just £15.7 billion. With total government spending of more than £1.2 trillion, this is not very much headroom at all. Reeves is just a hairstyle away from breaking her rules.
But it is all fantasy anyway. Does anyone think that the OBR, or anyone else, can really forecast government spending and borrowing in four years’ time? These forecasts are sitting waiting for the tiniest breeze to blow them off-course. And real-life government finances are not subject just to slight breezes, but often to monstrous hurricanes like Covid.
Reeves is very proud of her time at the Bank of England, as she keeps telling us. She wants to do things right, get her numbers to add up on some balance sheet deep into the future. She thinks like one of the official government bean-counters for whom Truss had such contempt. Markets didn’t have much confidence in cavalier Truss’s own ability to manage the public finances. But then they don’t seem overly relaxed about roundhead Reeves either. Bond markets calmed a little on Friday after the yield on ten-year UK gilts reached 4.6 per cent on Thursday afternoon, up from 4.25 per cent earlier in the week and under 3.8 per cent in September. The revelation of an error in the OBR’s reckoning won’t help settle them for next week.
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