OBR says Reeves knew about improved forecasts long before dropping income tax rise

The Office for Budget Responsibility has questioned claims that Rachel Reeves decided to abandon an income tax rise because economic forecasts had improved, pointing out that the chancellor was aware of the revised projections well before she changed her mind. The intervention adds new tension to an already fraught relationship between the Treasury and the official forecaster, and has placed further scrutiny on the story surrounding the budget process.

Richard Hughes, the chair of the Office for Budget Responsibility, took what he called an unusual step by writing directly to the Treasury select committee. He said that he felt compelled to outline how the forecast evolved over the autumn given the circumstances of the situation. His letter was released during a week marked by speculation around the budget, which began even before the Office for Budget Responsibility accidentally published its documents online earlier than intended.

Reeves had delivered an early morning scene setting speech on four November, a move widely interpreted as preparing voters for the possibility that she would break Labour’s manifesto pledge on income tax. She repeatedly declined to rule out raising rates. Yet within days, when the final decisions were being made, Reeves and Keir Starmer decided not to pursue a rise. News of the reversal emerged in mid November.

Bond markets reacted poorly to the reports of the reversal, with yields on government bonds rising. Treasury sources then told journalists that the income tax rise was no longer needed because the Office for Budget Responsibility had provided more encouraging forecasts. These sources suggested that higher than expected wage growth and inflation meant Reeves needed a smaller fiscal adjustment.

Bloomberg carried a headline stating that Reeves tax reversal came after better forecasts from the United Kingdom watchdog, citing people familiar with the matter. Hughes letter, however, indicates that the narrative is not so straightforward. He included a chart showing how the forecasts improved through the autumn, a level of detail the body would not usually publish. The chart shows that by three October, during the first forecast round, Reeves was set to miss her first fiscal rule by two and a half billion pounds. She would have required adjustments of billions more to restore headroom depending on how much safety margin she wanted.

By the third round of the forecasting process, delivered to Reeves on thirty one October, the figures had improved to the point where she would meet her rule on balancing day to day spending and revenue with four point two billion pounds to spare. The Office for Budget Responsibility says that after that date no further changes were made to its economic or fiscal projections except those required to reflect Treasury decisions.

In the end, Reeves chose to raise taxes by twenty six billion pounds by the end of the forecast period. This increased her headroom to a more cautious twenty one point seven billion pounds and funded policy adjustments including the ending of the two child limit. Treasury sources insist that the Office for Budget Responsibility letter does not contradict their account. They argue that a final decision could only be made once the watchdog produced forecasts that incorporated the governments planned budget measures and their effect on growth.

The shadow chancellor, Mel Stride, accused Labour of misleading the public. He said the party had known all along that it did not need to raise taxes and had chosen to present the situation as if its hands were tied. He said Reeves used the prospect of a tax rise as a smokescreen before making a political choice to raise taxes anyway.

Relations between the Treasury and the Office for Budget Responsibility have been strained for months. Reeves criticised the timing of the watchdog’s decision to revise its productivity forecasts over the summer, which fed into a downgrade of growth expectations. She also complained that the Office for Budget Responsibility had not taken into account what the Treasury views as policies that promote growth, including a reset with the European Union and the possibility of a youth mobility scheme.

Hughes is scheduled to appear before the Treasury select committee on Tuesday. Members are expected to question him about what Reeves knew and when, as well as the findings of the inquiry into the accidental early release of the forecasting documents.