Live: Treasury Select Committee questions OBR over Budget

Here's a comprehensive summary of the provided YouTube video transcript, maintaining the original language and technical precision:

Key Concepts

• Office for Budget Responsibility (OBR): An independent body that provides economic forecasts and independent analysis of the UK's public finances.
• Budget Responsibility Committee (BRC): The committee within the OBR responsible for producing forecasts and assessments.
• Hog Review: An independent investigation into the inadvertent release of budget information.
• Pre-measures forecast: An OBR forecast prepared before the government finalizes its budget policies.
• Headroom: The margin between projected government revenue and planned spending, indicating fiscal space.
• Fiscal Rules: Targets set by the government for managing public finances.
• Productivity: The efficiency with which an economy produces goods and services.
• Real Household Disposable Income (RHDI): A measure of the actual purchasing power of households after accounting for inflation, taxes, and transfers.
• Net Migration: The difference between the number of people entering and leaving a country.
• Fuel Duty: A tax on petrol and diesel.
• Electric Vehicle (EV) Charge: A tax on electric vehicles.
• SEND (Special Educational Needs and Disabilities): Funding and support for children with special educational needs.
• Fiscal Multiplier: The impact of a change in government spending or taxation on overall economic output.
• Dynamic Scoring: A method of forecasting that considers how policy changes might affect economic behavior and, in turn, tax revenues.
• Guilt Yields: The return an investor receives on government bonds.

Summary of Proceedings

This transcript details a session of the Treasury Select Committee with witnesses from the Office for Budget Responsibility (OBR), Tom Joseph and Professor David Miles, following the recent budget and the inadvertent release of budget information. The session addresses the OBR's role, the budget process, and specific economic and fiscal forecasts.

1. Resignation of OBR Chair and Committee Response

• Main Topic: The committee acknowledges the resignation of the then-Chair of the OBR, Richard Hughes, following the Hog Review into the premature release of budget information.
• Key Points:
  • The committee expresses thanks for Mr. Hughes's stewardship over the past five years, noting his appointment during COVID and his handling of the mini-budget challenges.
  • The OBR leadership, represented by Tom Joseph, offers an apology to the committee, Parliament, the Chancellor, and the Prime Minister for the "hugely disruptive" early release of the budget document on November 26th.
  • Joseph and Professor Miles confirm their commitment to implementing all recommendations from the Hog Review to prevent future occurrences.
  • The committee states it will not discuss the Hog Review in detail today, recognizing that the OBR witnesses would not have had time to enact its recommendations. A future session will be scheduled for this.
  • The committee emphasizes the vital importance of the OBR's independence and its role in the system.

2. Clarifying the Budget Process and OBR Letter

• Main Topic: The OBR's letter to the committee, intended to "set the record straight" on the budget process and address media misconceptions.
• Key Points:
  • Professor Miles explains the letter was prompted by circulating media speculation that the OBR had come under pressure, potentially exceeding to it on issues like moving the interest rate window to favor the government, finding "extra money," or experiencing "wild fluctuations" in forecasts.
  • Specific Detail: The window used to assess market expectations of interest rates was decided in July, not shifted at the last minute.
  • Specific Detail: Fluctuations in the pre-measures forecast leading up to the final number at the end of October were gradual and "relatively small," not "wild." The headroom dipped from slightly negative to "ever so slightly positive."
  • New Information in Letter: The letter showed preliminary forecasts leading up to the final pre-measures number, correcting the misconception of wild fluctuations. This information (rounds one and two of preliminary forecasts) was new, though the final pre-measures estimate itself is usually published in the Economic and Fiscal Outlook (EFO).

3. Concerns Regarding Leaks and Public Debate

• Main Topic: The OBR's awareness of and response to leaks and speculation surrounding the budget.
• Key Points:
  • The OBR did not lodge a formal complaint about leaks but made it clear to Treasury officials that the information appearing in the press was "not helpful."
  • Concerns were raised during the lead-up to the pre-measures forecast when misconceptions began appearing in the press.
  • The OBR is confident that leaks did not originate from within its organization.
  • Major Concerns: Misconceptions that the OBR was a source of difficulty due to fluctuating forecasts, and that the OBR was pressured to select a specific interest rate window that was advantageous to the government.
  • Market Impact: The committee highlights the period of November 13th-14th, when the guilt market moved dramatically following information about potential positive news in the OBR forecast. Professor Miles acknowledges that there wasn't "immediately good bit of news" in that specific window from the OBR's perspective, but suggests the market moved when information was confirmed. He does not believe there was overt market manipulation.
  • Chancellor's Statement: Professor Miles interprets the Chancellor's statement on November 4th about a "very difficult budget" as consistent with the OBR's assessment of a "wafer thin" positive headroom, which was expected to turn negative due to known policy reversals (e.g., winter fuel payments, PIP).
  • False Market Concern: The committee presses on whether a "false market" in guilt prices occurred between the Chancellor's statement and the Treasury's clarification on November 14th. Professor Miles states that while there wasn't immediately good news from the OBR in that window, he doesn't believe the Chancellor's initial statement was misleading, but acknowledges the difficulty in judging the impact of subsequent messages.

4. OBR's Forecasting Process and Transparency

• Main Topic: The iterative nature of OBR forecasts and the decision to publish preliminary rounds.
• Key Points:
  • The OBR's fiscal forecast process is highly iterative, starting in the summer with hundreds of models.
  • Reason for Publishing Preliminary Forecasts: To correct misconceptions that the OBR's forecasts were fluctuating wildly and making the budget process chaotic. The OBR wanted to demonstrate that the changes were gradual and not indicative of instability.
  • Potential for Fluctuations: Forecasts can fluctuate due to economic shocks like oil price increases, equity market collapses, or tariff announcements.
  • Committee's Interest: The committee seeks to understand why they cannot have access to historical data on forecast fluctuations going forward. The OBR suggests this could be a sensible way forward but emphasizes they were not setting a precedent.
  • Interest Rate Window: The window for economic assumptions (guilt yields, Bank of England rates) was set in July. For the fiscal forecast, a later window (up to October 21st) was used to allow for more straightforward calculation based on the stock of government debt. This later window was agreed with the Treasury to allow them more time to finalize policy packages.
  • Government Communication Impact: The OBR does not believe government communications can easily manipulate their figures, as it would require sophisticated timing and information.

5. Productivity Forecasts and Methodology

• Main Topic: The OBR's decision to downgrade its UK productivity forecast and the methodology behind it.
• Key Points:
  • Professor Miles defends the decision to downgrade productivity forecasts now, rather than earlier, citing the difficulty of inferring underlying trends through major economic shocks like COVID and the energy price crisis.
  • Methodology: The OBR aims to assess the "underlying trend rate of growth of productivity." This requires waiting for the "dust to settle" after significant shocks.
  • Data Analysis: By mid-2025, two years of data were available that were unlikely to be seriously affected by earlier shocks. This data showed no significant bounce-back in productivity growth compared to earlier periods after the financial crisis.
  • Institutional Decision-Making: The decision involved extensive discussions with OBR economists, an advisory panel of academic and city economists, and Treasury economists. Professor Miles took the lead on economic analysis, but the final decision was a collective one of the Budget Responsibility Committee.
  • "Productivity Porcupine" Criticism: Professor Miles responds to the criticism that the OBR has been too optimistic over time by noting the series of significant negative shocks since the financial crisis (financial crisis, COVID, energy prices) which have all negatively impacted output and productivity.
  • Dynamic Policy Scoring: The OBR's "dynamic policy scoring" document from 2023 assumes no fiscal multipliers from year five onwards, meaning government policy is assumed to have no impact beyond that point.
  • Pro-Growth Measures: The OBR does consider pro-growth measures, but they must meet a "significance threshold" of 0.1% of GDP five years down the line (approximately £3.5 billion). Measures like the India trade deal or housing policies might have meaningful effects but may not meet this threshold within the five-year forecast horizon.
  • Multiplier Judgment: The OBR's judgment on fiscal multipliers is that short-term demand boosts tend to fade as the Bank of England manages inflation, and long-term effects only occur if productive potential is permanently changed.
  • Top-Down vs. Bottom-Up: The productivity forecast is a judgment that looks at past trends, historical shocks, and potential impacts of AI and trade environment changes. A forward-looking, bottom-up forecast is difficult due to the inherent uncertainty.
  • Scenarios: The OBR produces scenarios to illustrate the impact of productivity staying lower than forecast or returning to pre-financial crisis levels.

6. Fiscal Forecasts and Government Policy

• Main Topic: The OBR's assessment of the government's fiscal targets, borrowing, and specific policy impacts.
• Key Points:
  • Labor Income Growth: Higher-than-expected wage settlements (around 5%) and stronger inflation figures contributed to a positive surprise in labor income growth, boosting tax receipts. This was partly due to frozen income tax thresholds, which increase the effective tax rate.
  • Fiscal Drag: Frozen tax thresholds increase the tax burden on individuals, effectively acting as a tax increase and reducing disposable income.
  • Welfare Costs: Higher inflation and earnings also increase welfare costs through benefit uprating.
  • Real Household Disposable Income (RHDI): RHDI growth is projected to be low (around 0.3% per year) beyond the current year, due to significant fiscal tightening and the reduced productivity growth forecast.
  • Imputed Rents: Professor Miles explains imputed rents as the valuation of services from owner-occupied homes, which are included in RHDI as a source of income. He clarifies that housing costs are not directly offset within this measure.
  • Net Migration: Recent net migration data is lower than forecast. The fiscal impact depends on the composition of migrants (e.g., whether they are working and paying taxes). Short-term impacts are generally positive if migrants are working.
  • Balanced Budget Target: The OBR's central forecast shows increased headroom against the target of a balanced current account budget by 2029-30 (£22 billion). However, the consolidation is "backloaded," with borrowing increasing in the short term and only decreasing at the end of the period.
  • Risks to Fiscal Targets: Significant risks include pressures on public spending, particularly the commitment to increase defense spending beyond the spending review period and the funding of SEND provision.
  • Debt Trajectory: The OBR highlights that government debt relative to GDP cannot continue to rise indefinitely and will become unsustainable. A sustained effort is needed to reduce debt.
  • Borrowing Stuck at 5%: UK borrowing has remained around 5% of GDP since the pandemic, despite plans for reduction, due to shocks and changes in government plans.
  • SEND Funding: The OBR has flagged the £6 billion pressure from moving SEND funding from local authorities to central government as a risk, as the government has not yet detailed how it will be funded within the existing spending envelope. The Department for Education disputes the OBR's scoring of this as a cut to mainstream school spending.
  • Government Efficiencies: The OBR has not built assumptions about the impact of efficiency targets into its public spending projections but acknowledges that achieving these targets will be crucial for meeting overall spending plans. Past evidence suggests efficiency savings can be achieved but are challenging.
  • Stock Market Correction: The OBR has modeled scenarios for a significant fall in global equity prices (35%), with a smaller impact on the UK (15%) due to lower valuations. Such a fall would negatively impact government revenue and public sector net financial liabilities.
  • Gambling Taxes: The OBR's costing of changes to gambling taxes assumes operators pass on costs to customers, leading to reduced demand and some shift to the illicit market. Evidence from other countries suggests this shift is not "huge" in well-regulated markets.
  • EV Charge vs. Fuel Duty: The new EV charge is projected to offset only about a quarter of the lost fuel duty revenue in the long term, due to a lower rate and its current exclusion of vans and lorries. The OBR predicts a reduction in EV sales due to the charge, but this is offset by other government incentives.
  • Fuel Duty Uprating: The cumulative cost of not uprating fuel duty since 2010 is estimated at £120 billion. Not uprating fuel duty by RPI from April 2027 would cost about £3.5 billion per year and could impact EV demand.
  • Dividend Tax: The increase in dividend tax for basic and higher rate taxpayers is considered a relatively small increase with a zero impact on behavior over the five-year forecast period, partly because additional rate taxpayers pay a significant portion of dividend taxes.
  • Budget Measures and Growth/Productivity: The OBR stated that the measures in the budget did not improve aggregate growth or productivity in the UK. This is attributed to higher tax take impacting incentives and the lack of policies meeting the significance threshold for productivity impact.
  • NHS Productivity: The OBR could not provide a definitive yes/no answer on whether NHS productivity has returned to pre-pandemic levels, as this specific data was not included in the current report.
  • Employment Rights Bill: The OBR has not yet incorporated the impact of the Employment Rights Bill into its forecasts due to legislative uncertainty and the need for secondary legislation.
  • Salary Sacrifice for Pensions: Changes to salary sacrifice measures for pensions are expected to have a long-term impact, potentially leading to lower pension savings due to reduced tax benefits.

7. Relationship with the Treasury

• Main Topic: The nature of the relationship between the OBR and the Treasury.
• Key Points:
  • The OBR acknowledges a "creative tension" with the Treasury as part of its watchdog role.
  • They rely on the Treasury and other government departments for analysis and have a close working relationship.
  • The OBR is committed to working constructively with the Treasury in the future.
  • The Treasury agreed to the publication of the OBR's letter to the committee, with the understanding that it would not set a precedent for routinely publishing preliminary forecasts.
  • The OBR would support providing information to the committee if they felt buffeted by briefings in the future.

8. Guilt Yields and Sterling

• Main Topic: The reasons for higher UK guilt yields compared to France.
• Key Points:
  • Currency: UK gilts are denominated in sterling, while French government bonds are in euros. The euro is a more widely held global currency, leading to greater demand for euro-denominated assets.
  • EU/ECB Support: There is a perception that the European Union or ECB might offer support to France in fiscal difficulties, which is not available to the UK.

9. Conclusion and Synthesis

The session highlights the OBR's commitment to transparency and independent analysis, particularly in the wake of the budget leak incident. The OBR witnesses provided detailed explanations of their forecasting methodologies, the rationale behind their decisions, and the potential impacts of various economic and fiscal policies. Key takeaways include the OBR's efforts to correct public misconceptions about its forecasting process, its cautious approach to assessing pro-growth policies due to significance thresholds, and the significant fiscal challenges posed by long-term debt trajectories and spending pressures. The committee's focus on the OBR's independence and its role in holding the government accountable for fiscal management remains central. The discussion also underscores the inherent uncertainties in economic forecasting and the importance of clear communication from both the OBR and the government to maintain market confidence.