OBR moving to ‘trust but verify’ relationship with Treasury after ‘black hole’ row – business live | Business

Liberal Democrat MP Bobby Dean then asks the OBR about the impact of raising employers’ national insurance contributions.

OBR member professor David Miles says the OBR’s analysis shows that in the long run, the majority of the impact is that real wages will be lower than they would otherwise of been.

[reminder: Rachel Reeves announced that the main rate of employers’ National Insurance contributions will increase from 13.8% to 15% from April 2025, and lowered the threshold at which an employer has to pay on a worker’s salary from £9,100 a year to £5,000.]

The OBR estimates that three-quarters of the impact of raising employers’ NICS payments falls on workers, with a quarter showing up in lower profits.

Miles says:

Nobody escapes completely, but more of it falls on workers in terms of lower real wages than in lower profits.

The impact in the short-run is a bit different, though, as employers aren’t going to hit workers with immediate pay cuts. Instead, it’s likely that pay rises will be lower in the next few years, to cushion the impact.

Richard Hughes adds that the OBR relies on the Treasury being forthcoming on their best estimates of the costs of government policies and the risks around them.

In this case [the March forecasts], that does not seem to have happened.

Conservative MP John Glen asks about the political row over the ‘black hole’:

Q: Isn’t it highly regrettable that you’ve been sucked into this political debate about a black hole; can that be avoided in future?

Hughes says “what happened” is regrettable.

There was a serious overspend against our forecasts, we’ve needed to make serious adjustments to that, governments had to make serious adjustments to policy.

The OBR doesn’t have the luxury of standing on the sidelines on these things, Hughes points out – it has to draw up forecasts for departmental spending. If there are errors, or undisclosed information, it has to correct for that and explain itself.

Q: Ministers relied on officials to provide whatever information the OBR requested – so how can information not be disclosed, given the integrity of Treasury officials?

Hughes replies that the OBR relies on the Treasury to disclose the information it has at the time about departmental spending, adding:

That information was not shared with us at the time of the March budget, and it was information that was available to the Treasury at the time.

The Treasury committee then turns to the ‘black hole’ which Labour claims it found in the public finances when it took office.

OBR chief Richard Hughes explains that the OBR is changing the way it interacts with the Treasury when drawing up its economic and fiscal forecasts.

He tells MPs:

We are moving from a system of trust, to a system of trust but verify.

That will see the OBR ask more questions about the pressures on departmental budgets, and what decisions on, for example, pay, will mean for those budgets.

That, Hughes says, should mean that the “failure of oversight that very clearly happened in March doesn’t happen again.”

Hughes explains:

It will involve greater scrutiny on our part of departmental spending limits, and the preparations of departments’ budgets, to make sure that those kind of pressures do get disclosed to us, and we have a conversation about how they will be managed and offset, and what it means for departmental overspending or underspending.

Hughes outlines how the OBR had built up a way of working with the Treasury over the years, which was a “high trust relationship with the Treasury” that expenditure pressures on depatments were being well managed and managed within the spending total allocated to departments.

He admits:

That system very clearly broke down.

Hughes explains that the OBR was not aware of the extra pressures on government departments when, in July, chancellor Rachel Reeves told MPs there was a £22bn black hole in the public finances.

After that happened, Hughes says the OBR asked the Treasury what they were aware of when the fiscal watchdog put its March forecasts together.

That uncovered “£9.5bn of net [spending] pressure which they did not declare to us, which under the law and under the Act they should have”, Hughes says.

Labour MP Dr Jeevun Sandher then asks about the impact of the UK’s health crisis on the economy.

Q: Is it fair to say that potential output is limited by the state of our NHS, with the highest waiting lists in history?

OBR chief Richard Hughes says hundreds of thousands of people are out of work due to health reasons.

But most people on the waiting lists are not those people, Hughes adds: they’re people who are older, who weren’t working, or are still working even though they need healthcare.

So fixing the lengthy waiting lists might have some impact on the labour force.

Liberal Democrat MP Chris Coghlan turns the OBR’s attention to the rise in government borrowing costs after the budget.

Q: How worried are you about the increase in gilt yields – they rose by 10 basis points on Friday, compared to 40 points after the 2022 mini-budget?

OBR chief Richard Hughes says the fiscal regulator had expected the budget to be “a surprise to the markets”, due to the volume of government debt (gilts) that are to be issued.

He tells MPs:

“To a large extent the gilt market response was just a response to higher volumes – if there are more gilts on the market that drives down the price.”

[Reminder: the yield (or interest rate) on a government bond measures the cost of borrowing, and rises when prices fall].

Hughes adds that “the front-loading of the expenditure” in Rachel Reeves’s budget was also a surprise.

The volume that the market was being asked to take down this year and next was more than they expected.

He explains that the OBR had expected the gilt market to be a bit surprised – that’s why the OBR raised its forecasts for UK interest rates by a quarter of one percentage point.

Hughes adds that gilt yields have now settled broadly in line with its forecasts, tho “maybe a little bit above, but not significantly”.

Today, UK 10-year gilts are yielding 4.48%, up from 4.31% the day before the Budget, but below the 4.53% they hit after the fiscal event.

The Treasury Committee kicks off its hearing with the OBR by asking about its forecasts for GDP growth, which are “typically more optimistic” than the Bank of England’s.

Richard Hughes says the OBR has revised its forecast for growth this year up to 1.1%, after the “relatively disappointing” growth of almost 0% last year.

He tells MPs:

We do think that the combination of the momentum coming into this year plus the boost given to GDP by government policies boosts that growth rate up to 2% going into next year.

But, Hughes then cautions that this is mostly a “temporary boost to output”, due to the government increasing spending by more than taxation in this budget.

That raises GDP by half a percentage point at its peak, but it’s a temporary effect, with growth expected to dip back to 1.5% at the end of the forecast horizon (to 2029-30). That, Hughes points out, is below its estimated long-run potential growth of the UK, of around 1.66% per year.

Conservative MP John Glen probes the OBR on this….

Q: Your assessment over the forecast period is that growth will be 0.7% lower than expected at the March budget. The government, though, would argue that their supply-side reforms would have a positive effect on growth – why have you not factored that in?

OBR member David Miles says the substantial investment in public investment will lift growth, but that takes time to come though – so most of the impact on growth will arrive beyond the five-year horizon.

But on the downside, Miles says the increase in employers’ national insurance contributions will dampen labour market growth, which hurts the UK’s productivity in the long term.

Miles adds that productivity growth has been “absymal” in the last 12 years, for various reasons (such as Covid, and the invasion of Ukraine). The OBR takes the view that the next 10 years will be more positive – and roughly halfway between the dismal last decade and the brighter 40 years before that.

Over in parliament, MPs on the Treasury committee are taking evidence from the Office for Budget Responsibility about last week’s budget.

They’ll hearing from Richard Hughes, Chair of the OBR, along with professor David Miles and Tom Josephs, who are both members of the Budget Responsibility Committee.

The committee says its scrutiny is “likely to examine whether the Chancellor’s new fiscal rules are right for the health of the UK economy and changes to spending, taxation and debt”.

You can watch it live here:

Looking back at the US election, bond trading giant Pimco suggests that the potential economic impact of the candidates’ policies could be less than the market assumes.

Libby Cantrill, Pimco’s head of U.S. public policy, points to four areas where the choice between the Republican and Democratic candidate won’t make a difference:

Specifically, 1) deficits will be higher under either Kamala Harris or Donald Trump – and the differences between the two are not likely to be that much different due to the narrow Congressional majorities that either will likely have to contend with);

2) both candidates will have to deal with taxes in 2025 due to the expiring tax cuts under the Trump Tax Cuts and Jobs Act, and in either case, we are likely to see most, if not all of the tax cuts be extended;

3) both candidates will continue to be hawkish on China; and

4) the Fed will remain independent due to institutional guardrails and no current vacancies (and despite some jawboning that we can expect if Trump wins in particular).

But there are (clearly!) also large differences between the two candidates.

And on economic issues, Cantrill identifies three:

1) tariffs, which are likely to stay high under Harris on China but will likely go higher under Trump and other countries are likely to be subject to increased tariff pressure as well

2) immigration, although we would note that for Trump to do some of what he is said he will do would largely require Congress, and:

3) regulation, where we would expect Trump to have a lighter touch (we would note that reversing regulation is hard, although there would undoubtedly be more regulatory certainty under Trump from the absence of new regulation as well as rolling back Biden executive orders).

Just in: Car sales in the UK fell last month, despite a pick-up in registrations of electric vehicles.

Industry group the SMMT reports that businesses, fleets and private buyers registered 9,241 fewer vehicles last month than in October 2023, bringing total new registrations down to 144,288.

Sales of diesel-powered cars fell by 20%, with petrol down 14% year-on-year.

But…. sales of battery electric vehicles (BEVs) rose by 24.5% year-on-year, helped by “a raft of new models driving the strongest growth this year”. That lifted Bev’s share of the market to 20.7%.

The SMMT warns, though, that manufacturers are subsidising the transition to electric cars with “billions in unsustainable discounting”, adding:

One in five BEV models now retailing for less than the average petrol or diesel but consumer support still needed for fast and fair transition.