Rachel Reeves was accused of ‘lying’ to the public and markets today after the Treasury’s own watchdog revealed she was told months ago that there was no hole in the public finances.
The Chancellor delivered a series of extraordinary grim warnings about the state of the government’s books in the run-up to the Budget.
She flagged that the Office for Budget Responsibility was downgrading productivity, as well as blaming everything from Brexit to Tory austerity and Donald Trump for a ‘worse than expected’ outlook.
Ms Reeves even made a highly unusual ‘scene setter’ speech in Downing Street on November 4 hinting that she would have to breach Labour’s manifesto promises not to increase income tax.
And six days later she gave an interview to the BBC in which she insisted that the only way to balance the books without an income tax hike was to cut ‘capital spending’ – something she made clear she was not willing to do.
However, a bombshell letter from the OBR to the Treasury committee has now laid bare that Ms Reeves has known since September that revisions to tax revenues had almost completely offset a £21billion productivity downgrade.
By October 31 the watchdog said it had informed Ms Reeves that she was in fact meeting both her fiscal rules without the need for any action – giving her more than £4billion in headroom.
In the event the Chancellor announced an eye-watering £30billion package of tax rises on Wednesday, a large chunk of which went on benefits rises that had been demanded by mutinous Labour MPs.
She had already U-turned on the hints of income tax rises – if they were ever seriously considered – but only after the fact they were not happening was leaked to the Financial Times.
The dramatic revelation sparked fury, with the Chancellor accused of ‘deliberately misleading’ the public and markets.
On November 4 Ms Reeves told the press conference in Downing Street: ‘The OBR – the UK’s public finance watchdog – will set out the conclusions of their review of the supply side of the UK economy.
‘I will not pre-empt those conclusions but it is already clear that the productivity performance… is weaker than previously thought.
‘A less productive economy is one that produces less output per hour worked.
‘That has consequences for working people – for their jobs and for their wages… and it has consequences for the public finances too, in lower tax receipts.’
Speaking to BBC Radio 5 Live on November 10 she went even further with her apocalyptic hints, saying ‘it would be possible’ to stick with the manifesto commitments ‘but that would require deep cuts to capital spending’.
It was not until November 17 that the Financial Times reported the idea of an income tax rise had been dropped.
That clearly sparked turmoil in the Treasury, as interest rates on gilts – the government’s main method of borrowing – rose on concerns Ms Reeves was not willing to take strong action to balance the books.
Government sources then finally admitted that the OBR figures were better than previously thought, suggesting that was why the manifesto-busting tax rise was not needed. However, the briefing again sowed more confusion as they still indicated Ms Reeves had a large fiscal hole to plug.
In a letter to the Treasury Select Committee published today, OBR chair Richard Hughes set out the exact timeline of what the Chancellor was told.
The watchdog’s initial forecasts did not account for the costs of Labour’s humiliating U-turns on benefits curbs and scrapping winter fuel allowance.
But Mr Hughes spelled out that Ms Reeves had been notified in mid-September that the impact of productivity downgrades – worth around £21billion a year – had been wiped out by upgrades to taxes.
‘The 0.3 percentage point reduction in underlying productivity growth was included in our Round 1 forecasts for the economy (transmitted to the Treasury on 17 September) and for the public finances (transmitted to the Treasury on 3 October),’ he said.
‘Our Round 1 forecast was also a full forecast and therefore also included increases in real wages and inflation which offset the impact of the productivity downgrade on receipts.’
He said that ‘other changes in the outlook for spending’ meant that the Treasury’s target for balancing spending was missed by a small margin of £2.5billion.
The target for having public sector debt falling was seen as being missed by a tiny £0.5billion.
‘Our Round 3 fiscal forecast, the final pre-measures forecast, was submitted to the Chancellor on Friday 31 October,’ Mr Hughes continued.
‘In this forecast round, both of the Government’s fiscal targets were on course to be met with headroom of £4.2billion for the current balance and £11.1billion for PSNFL falling.
‘No changes were made to our pre-measures forecast after 31 October.
‘The only changes to the post-measures forecast reflected the impact of the policies submitted by the Treasury in the two subsequent forecast rounds: Round 4, which reflected the impact of the Government’s initial policy package, and Round 5, which reflected the impact of the final policy package.’
Ms Reeves defended the huge tax rises in her Budget by saying she had rebuilt the headroom to more than £20billion – double the amount after her previous fiscal package.
Tory leader Kemi Badenoch posted on X: ‘Yet more evidence, as if we needed it, that the Chancellor must be sacked.
‘For months Reeves has lied to the public to justify record tax hikes to pay for more welfare.
‘Her Budget wasn’t about stability. It was about politics: bribing Labour MPs to save her own skin. Shameful.’
Tory frontbencher Neil O’Brien said: ‘She lied so that she could produce ”better than expected” numbers and say rates were not going up as a budget ”rabbit”.’
One Treasury veteran told the Daily Mail that playing ‘fast and loose’ with briefings would come back to bite the Chancellor.
‘HM Treasury cannot mislead media – they need to be trusted as their word may be needed to stop bad stuff happening,’ the veteran said.
Downing Street denied that Ms Reeves had ‘misled’ the country, saying had been ‘very clear’ about the decisions.
Asked about the OBR telling Ms Reeves that the productivity downgrade had already been fully offset, a No10 spokesman said: ‘At the Budget she set out the decisions very, very clearly.’
Pressed that Ms Reeves could have ‘significantly misled’ markets, the spokesman said: ‘I don’t accept that. As she set out in the speech she gave here, she talked about the challenges the country is facing. She set out the decisions very clearly at the Budget.’
