Labour strengthens economic watchdog to prevent repeat of Truss mini-budget

Ministers will be forced to consult the official watchdog before making major tax and spending changes, in a new Bill designed to avoid a rerun of Liz Truss’s 2022 mini-budget which spooked investors and sparked a run on the pound.

The Office for Budget Responsibility (OBR) will have new powers to scrutinise and publish a financial forecast of any “significant and permanent tax and spending changes” by the Government, Labour confirmed in the King’s Speech today.

Labour described the new Bill as a “fiscal lock”, adding that it would “prevent significant uncosted measures from being announced without sufficient scrutiny to mitigate the impact on the public finances”.

Stability

The King said in his speech: “Stability will be the cornerstone of my Government’s economic policy and every decision will be consistent with its fiscal rules.”

It was announced alongside dozens of other Bills as part of the State Opening of Parliament, where the Government outlines its legislative agenda for the years ahead.

The Bill comes less than two years after Conservative Prime Minister Ms Truss and her chancellor Kwasi Kwarteng’s £45 billion string of planned tax cuts in a so-called mini-budget in autumn 2022.

Mr Kwarteng broke with tradition by refusing to publish the OBR’s autumn forecast, which contributed to financial market jitters ahead of the announcement.

After he announced the plans, markets panicked, triggering a run on sterling, gilt market freefall and soaring mortgage costs. Mr Kwarteng was sacked as chancellor three weeks later, and after only 38 days in the job.

When the OBR’s forecast was eventually published the next year, it revealed the watchdog had told Mr Kwarteng that the economy was heading for a recession, and that higher interest rates were making it more expensive for the UK to service its debts.

The OBR, founded by Conservative chancellor George Osborne in 2010, usually produces forecasts twice a year, to accompany the spring budget and autumn statement.

Market credibility

Labour first mooted the Bill in 2023. It said today that the measure would “reinforce market credibility and public trust by preventing large-scale unfunded commitments that are not subject to an OBR fiscal assessment”.

It added: “The ‘fiscal lock’ is intended to capture and prevent those announcements that could resemble the disastrous Liz Truss ‘mini-budget’, announced on September 23 2022, which would have cost £48 billion per year by 2027/28, and was not subject to an OBR forecast and damaged Britain’s credibility with international lenders.”

Joe Nellis, economic adviser at tax firm MHA, said: “In removing the potentiality of the Government using short-term measures for political gain, the financial markets will be reassured that the Government can be trusted with the economy.”

Paul Diggle, chief economist at fund manager abrdn, said the policy “won’t make a practical difference to how the Labour Government does fiscal policy, because it was always going to involve the OBR anyway”.

“But it is part of Labour’s efforts to project fiscal and economic prudence, and keep financial markets on side.

“The litmus test of success for Labour will be whether they can get UK growth going again, which is going to require difficult reform of the planning system, green industrial policy, and a potentially closer relationship with the EU.”