Andrew Gilligan: Truss was right about Britain’s fiscal straightjacket – but not how to escape it

Andrew Gilligan is a writer and former No10 adviser to Boris Johnson and Rishi Sunak.

I’ve never dodged a bigger bullet than the day Liz Truss tried to recruit me as her head of policy.

We live round the corner from each other – I used to tease her that my road is posher than hers – and in 2021, when she was international trade secretary and I was a policy adviser to Boris Johnson, we’d sometimes go for bike rides on Sundays. On the last of these, her objective became clear: she was preparing a leadership team for when the time came.

Sitting in a café by Ladywell railway station, I asked her what policy she wanted me to be head of, and she gave me a full preview of the nuclear explosion later to be known as Trussonomics. I may have been one of the first people to hear it. I remember thinking: Jesus, this’ll crash the bond markets, we’ll be out of power for 20 years, thank God she’ll never be prime minister!

Perhaps I should have told her the bond market bit – not that it would have made any difference, of course – but my polite murmurs of disagreement and loyalty to Johnson were enough, and it was the last substantive conversation we had.

Yet observing Rachel Reeves’ struggles ahead of her spring statement next week, it is hard to disagree that parts of Truss’s diagnosis (as opposed to her ruinous methods) had merit. As she argued, any future Tory government must do something about the hardcore bondage we have strapped ourselves into with fiscal rules and the Office of Budget Responsibility.

The most important of Reeves’ “iron-clad fiscal rules”, from which she has pledged she “will not waver”, is that the current budget – that is, day-to-day spending – must be balanced or in surplus by 2029/30. Her double whammy of spending cuts and tax increases is designed to meet this rule. To pronounce on whether she will do it requires the OBR to predict what the public finances will look like in five years’ time, which in turn requires it to predict precisely what economic growth will be.

As Sir Charlie Bean, former deputy governor of the Bank of England (and ex-member of the OBR’s three-strong executive committee) put it yesterday:

“We’ve got ourselves into a frankly pretty ridiculous position where we’re doing fiscal fine-tuning to control the OBR forecast five years ahead. The OBR forecast… [is] pretty flaky… we want to get away from this idea that we continually have to be neurotically changing taxes and spending to try and control this OBR forecast so that it’s hitting our target.”

Or take the economist Daniel Susskind:

“The idea that the OBR somehow knows enough to take each UK government policy and state its impact on growth to a single decimal point is fanciful. Yet that is what it will attempt to do at the end of the month, with immense practical consequence. A reduction of 0.1 percentage point in the OBR’s potential productivity growth forecast, for instance, is estimated to create a hole of £7bn-£8bn in the public finances – that is the equivalent of the entire budget of Defra.”

Some of this is Reeves’ own fault. The OBR’s growth forecasts would not be so important if Labour had not choked off the rather encouraging growth of early 2024 with Sir Keir’s summer of doom-laden rhetoric followed by Reeves’ abysmal October budget. And the Chancellor has only tightened the buckles on the straitjacket, changing the fiscal rules to explicitly bake in the OBR numbers.

Some of it, of course, is a reaction to Truss. But her problem wasn’t always her goals, but rather the crass and extreme way she went about them. In a heavily-indebted country like Britain, a vital main purpose of the OBR and the rules is to convince the bond markets that we are sensible. So simply cutting the OBR out of a radical Budget, as Truss did, was never going to fly. But could a subtler approach work?

We might, for instance, instruct the OBR to produce forecasts in a wider range, reflecting no more than the reality that these things are uncertain; we could ask it to model different scenarios; we could ask the Treasury to resume producing its own forecasts alongside the OBR’s. All this would make the whole exercise less definitive and give governments more leeway. It’s also been suggested that in the new world order the markets would accept the exclusion of defence from the spending number.

And there are wider reasons, essential to the reinvention which the British state and economy needs, for rethinking the OBR’s role.

Few Tories would dispute the importance of getting our own citizens back to work and minimising immigration. But the way the fiscal rules work makes this much harder to achieve, because the OBR projections for migration feed into its forecast for tax revenues and the public finances; last year, it observed that a “low-migration” scenario would widen the fiscal gap by £14 billion or more.

Other policies with short-term costs and long-term benefits, including tax cuts, are also harder to pursue because of the OBR and the fiscal rules. Truss wasn’t wrong about that, either.

None of this is to say the OBR should be abolished, or to accept Truss’s silly claim that it was part of a left-wing economic conspiracy against her. Its forecasts probably are less biased and more accurate than those previously done by the Treasury, though that’s not saying much. As in the old jibe by the economist JK Galbraith, the only function of economic forecasting is to make astrology look respectable.

The truth is that the fiscal rules are anything but “iron-clad”: Reeves’ are the tenth set since Gordon Brown thought up the idea in 1997. And if people like Bean are speaking out, the climate is changing. But any moves would have to be measured, properly planned and carefully signalled, with the markets warmed up.

Labour could do this too, but instead it looks like they are doubling down, insisting their rules are “non-negotiable.” They appear to have painted themselves into a corner – leaving a space open for the Conservatives, at least if we ever got round to talking about economics again.