The OBR's verdict on Healey

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0:40Hello and welcome to Coffeehouse Shots. I'm Tim Shipman, the police collaborator of The Spectator, and I'm absolutely delighted today to be joined in this post-budget world by David Miles of the Office of Budget Responsibility. David, you're the man sent out and about by the OBR to explain it all to us the next day. I mean, there was a lot of talk about this being a sort of non-event budget, but there's a heck of a lot of measures in here. 98, I think, which is the most we've seen since 2010. Ultimately, you know, is this a big or a small budget in your view? Where are we in terms of the total picture, the overall loosening and tightening?

1:12And does that change us through the forecast period? Just give us the big picture. Well, I think by the standards of recent budgets, it's not a big net budget in the sense that there is a slight loosening and a bit more spending in the short term largely to try and offset the impacts of what's been a really big increase in energy prices and then further down the road to try and make sure that the government's on track to hit its fiscal targets and stop debt just carrying on rising rates for GDP some tightening in expenditure quite a few years down the road now so that by fiscal year 20 29 2030 on the central forecast of the OBR the government is just about hitting its target which would stop debt continuing to rise relative to GDP.

2:01And overall in terms of the loosening it looks like it's a sort of overall tax rise of about 6.9 billion I think that's that's the right number isn't it? For the loosening for the extra spending that comes up front. Yeah it's that kind of order of magnitude so it's not trivial but relative to the size of the economy that's relatively I mean people in the treasury saying this is smaller than what Rishi Sunak did pre-pandemic for example so in terms of the scale of these things it's it doesn't move things greatly it's limited and obviously I think it's a reflection of the fact that the fiscal situation remains very difficult and it's going to be hard to get to a point where debt stops rising and starts turning the corner a bit yeah and the government seem to have been boasting about that they've sort of said You know, they're patting themselves on the back using the IMF to say, you know, we're the good school boys here compared with a lot of the G7.

2:53Take us through the measures, though. I mean, there's 98 measures in this budget. A lot of them are absolutely minuscule. What are the big ones? There's a return to taxing the banks, though slightly at a lower rate than had been predicted. So some good expectation management by the government there. Still quite a lot of fiscal drag going on as well, aren't there? Are they the two biggest measures ultimately in this? Yes. I mean, in a sense, the fiscal drag part of it is not, in a sense, a new measure. It's just a continuation of what we've had for several years now. And that continues to bring in more revenue down the road and is one of the factors behind an increase in total taxes raised in the UK relative to GDP, which is on a trajectory on the OBL central forecast anyway to carry on going up and reach the highest we've had it since the end of the second world war maybe even the highest before that as well and what is that number ultimately where are we sort of heading well well I can tell you we if you if you go back to before covid total taxes relative to gdp were about 33 percent or so where we are right now is 36 37 so we've had quite a big increase where we get to in 29 30 is about 38 38 and a bit and that looks higher than at any point since the second world war and how is that comparable internationally i mean um are we uh becoming overtaxed or is that comparable if you what i'd say is that the the uk used to sit sort of pretty firmly between where say the us was in In terms of total tax relative GDP and halfway, roughly speaking, between that and where the rest of Europe was.

4:39Yes. And we're now moving toward the rest of Europe, but it's still quite a way short of the average rest of Europe level of taxes relative. And there seems to be a sort of, there's always a bit of a contrast, a bit of a conflict in Britain between kind of wanting American levels of taxation and European levels of public spending. And we seem still a bit to be on the horns of that. And it's difficult to make the fiscal numbers add up without debt going up if you're stuck trying to do both of those things. Talk to us about the back end of this parliament, though. I mean, I think what people who felt this was too small of a budget in terms of tackling the sort of fundamental issues that we face, they take a look at the government's numbers there.

5:20And if the Prime Minister is to be believed and he's not going to call an early election, then it seems slightly politically implausible that they're going to start making, you know, frankly, fundamentally quite large cuts, you know, in what the year before or a general election year. Just tell us what would need to be done on their current sort of trajectory. I mean, the number I saw yesterday was cuts of 2.6 % in every unprotected department. I've seen figures of£11 billion a year. What can you tell us about that? Well, there's a calculation that we made at the OBR, which depends on something which is a bit fuzzy and grey, which is what exactly is protected, what exactly are the promises.

6:03and they're not cast in stone but if you take things that have been said about defense about health spending and to some extent about education which are indications of desirable trajectories if you will rather than cast iron promises yeah if you take those at face value and where spending is projected to be at the back end of the forecast sort of three four years down the road, it's going to involve probably some cutbacks in spending and cuts in real terms on the non-protected bits. And I think our estimate is that that might be of the order of£11 billion relative to a trajectory for those unprotected bits, which would simply be flat in real terms.

6:53So you could look at that number and say, well,£11 billion in an economy of this size and 11 billion where government spending in total is, you know, 1.4 trillion or something, doesn't seem enormous. Or you could look at it and say, that's going to be quite tough. I think one way to look at it is to say, given where we start from in the UK, which is a situation where the stock of debt is nearly 100 % of GDP. And in 2025, the government was borrowing pretty close to 5 % of GDP, if you're going to get into a position where you close the gap between spending and tax revenue relatively quickly in the next three or four years, there is not going to be any easy way of doing that.

7:39And so any plan that is plausible is going to be very difficult and challenging. And if your definition of credible is, if it's difficult and challenging, they can't do it, then you're going to say it's not credible. Yeah. But to what degree does the OBR take that judgment? I mean, a lot of observers would say that that is politically incredible, and it's very unlikely, given how difficult they've found it to make welfare savings, for example, under Starmer, that they would achieve that. But as you say, economically, it's a fraction of 1 % of what we're, you know, a tiny fraction, really, and it ought to be doable.

8:16But to what degree does the OBR take a view on how credible it is within a political context? Our role really is to take the government plans as they have them and make an assessment of the economic and fiscal implications of those plans. So it does not involve a judgment that we don't think they're going to do that or be able to do that and all the rest of it. Of course the risks around any forecast we make are pretty substantial, but they are symmetric in a sense. So it could be that we've had a string of things really almost going back to the financial crisis, which are big negative, bitter, bad news, followed by a couple of years where nothing awful happened, then another big negative shock.

9:05COVID wars, all of that stuff. Exactly. We have had huge increase in energy prices, COVID. The financial crisis itself blew a huge hole in the UK fiscal position, a huge increase in debt right there. And it may be that for the first time over the next three or four years, there's no substantial negative shock and there's some good news. So, you know, we certainly wouldn't say in the OBR this is very unlikely that the government would be able to stick to this. Absolutely not. But anyway, our role is take the government plans as they are stated and assess the economic and fiscal implications of those plans being implemented.

9:40I mean, that's our job. Yeah. And similarly on the headroom. So Healy effectively said Reeves left me 23 billion. I've reduced that to 15. The markets seem prepared to swallow 15 billion as a credible number. But there's a little bit of a gamble there that things don't get much worse. And, you know, a lot of people in government think, you know, if Trump starts bombing around after the midterms, that could be wiped out quite fast. Again, how does 15 billion compare historically with the kind of cushion that governments have given themselves? And again, to what degree do you take a view on what the scale of that number ought to be?

10:16Well, 15 billion, one way to think about 15 billion, which is, again, the central forecast, which almost certainly will not turn out to be how things play out over time. It's the central forecast of what the current surplus will be if you look three years down the road. If you look four or five years down the road, it gets a bit bigger on our central forecast. That number is the difference between two huge numbers, which is government spending and tax revenue. It doesn't take much to blow you away from that by 10, 20 billion in either direction, in either direction. One indication of is 15 billion a bigger or small number is to look at what is the probability if there's no change in policy, but the government sticks to the policy, and there are neither good nor bad shocks, what's the probability, no very big good or bad shocks, what's the probability that you're on the right side of it?

11:12And it's about 56%, 57%. So it's better than tossing a coin, but it's not as certain as something which is a 60 % probability event. So that's quite limited. Of course, in a way, that is what it is. That's a number that's calculated on the basis that the government just doesn't change its policies no matter what happens. And it is always open to a government. If things, you know, say energy and oil prices are much higher than is the market forecast, which we use, you know, a year from now, that in itself would be an ambiguously bad news and it might do some damage to that headroom. Of course, the government can then respond to that.

11:54In a policy way. Exactly, in a policy way. So it's not the likelihood of things breaking the rules. It's the likelihood that they would have to respond, I guess, is the question. That's one way to view it, yes.

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12:44The OBR often gets bad press. And I mean, my view, having covered these things for a very long time is that you should take all the headline numbers with a pinch of salt but what i think is very valuable and listeners if they have time should do this is to go through the report and read it because there are some you know longer term observations in there which are fascinating i mean the one you know one that springs to mind is the sort of the effect that everything you've just talked about from the from 2007-8 onwards and my view is but you know british politics is still effectively dealing with the wash up from that financial crisis you know exacerbated by covid and all the rest of it just tell us about the effect that everything has had on on the cost of living because really the politics we've got now uh the rise of sort of uh politicians on you know sort of more extreme sides of left and right is partly a reaction to this it seems to me and the inability of governments generally to get to grips with the cost of living that you know the the observations the obr has made about that i think are pretty devastating pretty interesting Yes.

13:42I mean, I think what's happened since the financial crisis, which is what, 15, 16 years ago now, GDP per person in the UK, which in a sense is total incomes available to this country per person who is in this country. We used to think that was going to grow at two, two and a bit percent a year. Over the last 15, 16 years, it's grown by, you know, barely half a percent a year. So you lose 1.5 % a year for 15, 16 years. You're 25 % or maybe more down. So there's 25 % less real resources available to satisfy people in the UK than one might have thought on the eve of the financial crisis. I mean, that's the scale of what's happened.

14:31And in that environment, I think, it's very difficult for a government to do what the public want the government to do, which is always to try and cushion them against the kind of blows that the UK has had. And governments have struggled with that. And it's the big reason why the stock of debt, which was not much more than 30, 35 % of GDP before the financial crisis, is now pretty close to 100%. It's because the public, in a sense, has demanded a continuation of the provision of public services and lower levels of taxation than in some other countries for an extended period where the government has only been able to make that thing add up by borrowing.

15:19And that's where we are today. And it's no real surprise that people feel worse off, essentially, looking at those numbers. Yeah, it's hard to believe that people are going to be anything other than discontented. That's what's happened. You've lost 25, some people would put it, nearer 30 % of resources. Yeah, and the main sort of effort the government seemed to have tried to make to make people feel better is this£100 off your energy bill if you're in council tax bans A to D. Do you take a view at the OBR on how efficient or effective a way of doing it that is? No, it's what the government's decided to do.

15:55Some people might say, well, why isn't it more targeted? it's actually quite difficult to reliably come up with a way of making sure you get the money to exactly the right people. I mean, is that a better way, for example, than expanding the warm homes bonus, which is more targeted? There are different ways of doing it. I mean, in a sense, the advantage of giving people£100 rather than tying it specifically to their consumption of different things is that it gives people more freedom to decide, well, how are we going to use the£100? They can decide themselves. Yeah, they could decide themselves.

16:28I mean, of course, 100 quid is 100 quid. It's not 1000 quid. But then again, if the government tried to cushion people against most of the impact of the energy price increase on a scale that has been done in the past was done after the 2022 increases, then it would make the job of trying to get to a fiscally sustainable position even more difficult. And that was, of course, actually, looking back at that, you know, the famous trust mini budget, everyone thinks, you know, sort of slashing taxes was the problem. The problem, actually, the much more significant contribution to her downfall was the sort of unfunded, you know, support on energy bills.

17:05Look, we haven't got too much time, but the other numbers in this, in your report, which I found interesting with the growth numbers, you know, we've got a prime minister talking about growth in every postcode. He's talking about his, you know, his theory of growth about devolving power to boost growth. I mean, it's quite striking to me that, you know, growth is, you know, a little bit better this year, but down next year, isn't it, to 1%, which is, I think, down from a previous prediction of 1.5. It then picks up a bit. But even then, it's easy to say, you know, as we get to the end of the forecast period, everything will turn out better.

17:39And governments have a way of saying that, and often modelers do as well. But even then, it's, you know, we're talking 1.6%, 1.7%. We're not getting anywhere near the sort of 2%, which is sort of regarded as the kind of lodestar of a healthy economy. Just tell us what you scored on growth in this budget. What were the growth boosting measures and how did you score the sort of devolution plans of the prime minister, which he seems to think, I think he genuinely believes is a panacea of some description for kicking things on a bit. Well, I think the devolution plans are not quite yet clear and specific enough for us to take a strong view.

18:18In a way, that's also true of the sort of long term plans, for example, on the energy infrastructure and making access to the grid better. These are kind of long term physical infrastructure plans, which to the extent that they have a positive impact and they may well do, would tend to play out over, you know, 5, 10, 15 years rather than the next few years. So some things are in the category of they may well have an impact, but it's kind of beyond the horizon that we look at around budgets, which tend to be, you know, how long are we away from the point at which the targets are measured? And that's kind of three years at the minute.

18:55um other measures are well potentially they they they may have impacts but are a bit less specific and clear at the moment exactly how it's going to work devolution so the bottom line is you didn't score them very highly i think is the answer isn't it i mean i think the devolution was i think was it 0.2 to 0.4 percent over quite a long period i believe i think on devolution it was essentially we don't take a view of them yet as to what its impact on growth is likely to be so i think they're in the category of things that as they become clearer and as our horizons move further into the future as they do as time passes it may well be a point to make an explicit judgment but we haven't done it so this and obviously the other thing Andy Burnham is talking about a great deal now is potentially closing our relationship with with the EU now I think traditionally the OBR has scored leaving the EU at about minus four percent on on GDP is that still the OBR's view that that might be the potential gain of rejoining and then if it is what what relative to four percent might be single market membership or customs union membership i've spoken to people in the last 24 hours who think single market is probably about half that and maybe customs union about you know maybe one to one and a half percent potentially is does that sound right do you make a judgment on that in the report what's what's the view we don't because again it's unclear quite where policy is is going to go on that and there's nothing concrete to to assess at the minute um What I would say about the 4 % is, although there's a kind of shorthand way of describing it as that's the OBR assessment of what leaving the EU meant.

20:33Actually, I don't quite like that description. In a way, I think it's better to say you could have left the EU in many different ways. And as a result of negotiations, the UK has left the EU in a way which has ended up doing some clear, it's erected some barriers and costs to trade with our biggest trading partner. And you wonder whether Theresa May is sitting there thinking, well, if all these Labour MPs who want to get closer had voted for my deal in 2018, then we might not be in quite the same position. Well, I mean, you're right, there could have been a different deal. And if there had been a different deal, leaving the EU might have been assessed as not doing 4 % damage, but as doing 2 % damage, or possibly more than 4 % if you left it in a particularly antagonistic way.

21:20I mean, it was somewhat antagonistic, I guess, as it was. Anyway, where we go next is that if it's clear that there is some change in the relationship and there's some change in costs of doing trade with different countries, as that becomes clearer, the OBR will certainly take a view on it. No question about that. I mean, I guess what a Brexiteer would say pretty firmly is the EU isn't the same as the one we left. Maybe rejoining is not worth the same upside as what you would measure the costs of having departed in this fashion in the first place. And they would say there are other advantages to being out.

21:56And the government, in fact, in terms of its VAT changes and things like that, took advantage of some of those this week. And I think they would argue that when you look at the amount of regulation, particularly around sort of new industries like AI, that it's not quite a straightforward, you know, even if you accept the OBR's numbers, which I think a lot of Brexiteers wouldn't, it's not necessarily a straightforward equation in terms of calculating that going forward. It's certainly not straightforward. And it will depend on what, if any, you know, movement there is relative to the UK's relationship with the EU.

22:31One last issue, David, quickly. There was a bit of publicity ahead of the budget that the OBR would be scoring migration in a slightly different way. There's been a view that it's been a bit too positive about migration. Now, clearly, politicians look at potential social costs of that in a way that perhaps the OBR doesn't. but even the sort of long-term kind of costs of migration and families coming here. Just tell us what, if anything, you've changed on that and what the migration picture that we've now got means for growth. Burnham's been making the point that, you know, the migration we've had since Brexit is different because you've got people coming here sort of permanently and bringing families often from the subcontinent, whereas a lot of Europeans who came during the years we were in the EU were perhaps younger, came, made some money and then went home again.

23:22I mean just talk us through what the OBR has done on migration. Let me just start with the sort of big picture thing. It's absolutely the case that the economic and fiscal impacts of migration depend very sensitively on the kind of people who are coming. How many of them are going to work? How long are they going to stay? are they going to be people who come work pay taxes leave before they get older and maybe draw upon the health service and maybe some people will leave before they have access to welfare benefits anyway so it depends very much on the kind of people who are coming how long do they stay and we are acutely aware of that perhaps more aware than we've been in the past in the OBR on that.

24:10It's also the case that if you take a measure of what you might call average living standards in the UK, which I think is crudely but best measured by something like GDP per person, it's not at all clear that higher or lower levels of migration do much to that number. It's pretty obvious that if you have a very large number of people arriving, and a significant proportion of them work, aggregate GDP will almost certainly be higher than it otherwise would have been. It'd be strange if it wasn't. But GDP per head might not be changed. Exactly, that's not the same as GDP per person. I think it's also true that people who come when they're relatively young, have a high participation rate, and then may leave 10, 20, 15 years later before they have drawing on state pensions, if they've got eligibility, and before they use the health service most intensively, are in a purely fiscal sense much more helpful than people who come and stay for the rest of their lives.

25:11I mean, I think that's just an obvious fact. Back to the question what we did in this particular budget. Net immigration has been coming in at much lower levels recently than we thought a year or so back. We've lowered our projections as to the levels of net migration by a meaningful amount, something like 70 ,000 a year for the next few years. It builds back up slightly and it ends up in line with the Office for National Statistics projection of the long term. Which is sort of just 230, something like that. Yeah, 230 is about that number. But lower than that for the next few years. That has literally no impact on GDP per capita.

25:49Because we think that the people who would have come but don't come, similar characteristics of the people that are already here. Maybe they have a slightly higher participation rate because they tend to be in the 20s, 30s when they come, but they may well have on average slightly lower productivity. So those things kind of wash out in the aggregate. So it has a, actually that change has virtually no impact on what I would consider to be the best measure of the standards of living of the people in the UK. And just finally, I mean, it does still feel like we're in a bit of a mess in this country.

26:23Just sum up the sort of whole picture. Do governments need to get more radical generally about reining in spending? Do they need to take a view on what the economy ought to look like going forward? I mean, what's the OBR's view on the sort of big picture? I mean, I think a big start would be to get into a position where the fiscal situation is sustainable. We have to get to a position where debt no longer rises relative to GDP. I mean, you cannot stay on that trajectory because at some point you'll be borrowing so much that the bond markets, the financial markets will say, we've had enough of buying your debt.

26:59We don't think you're on a sustainable path. So you've got to get off that. And that in itself would be quite an achievement. And there is a plan to do that. And in some other countries, one thinks of the US, one thinks of France, there isn't even a plan that looks like it's implementable. I think that's why the IMF thought that the UK was in a better position than some. But that's a relative statement, not an absolute statement. It's still very challenging because if you look beyond just the next few years, as we do sometimes in our publications which take a 50-year horizon, there's all kinds of things down the road on demands for health care, on the implications of an ageing population, on the cost of state pensions, which make the fiscal challenges not just about the next few years and hitting the targets in 2930 but the the issues build significantly beyond that horizon so there's no question that that when you start from where the UK starts from and we're not unique in this there's other countries have got as much debt and have big deficits the challenge is is profound in some ways and I think part of that challenge is to help people better understand something which is not very palatable and it comes back to what we were talking about earlier the level of GDP may be 25 to 30 percent lower than people might have thought you know 20 odd years ago and I think the expectations that the public have may not have adjusted to that and that's a very difficult thing to swallow.

28:33Sobering thoughts. David Miles thank you very much indeed and thank you to all of you for listening.

28:40Thank you.

29:35The headline hammer.