229. BUDGET BONUS: Did the Treasury Lie?

0:10Hello and welcome to another Budget special edition of The Rest is Money with me Robert Perston And me, Steph McGovern. So this special episode is to do with some chaos that's kicked off in the last couple of days, if there wasn't enough already. And you know, for months on this podcast, we've been talking about the grim state of our public finances and how big the black hole is, and what Rachel Reeves is going to do about it or might do about it in the budget to meet her fiscal rules, not break election manifestos or break them, depending on how you look at it. and essentially fill the black hole.

0:47Now, a lot of that analysis about how big the black hole is has been based on OBR forecasting that we've been told about from the government. But it turns out that we've not been given the whole picture by the Treasury. And that is why it's all got dramatic. And Robert, I know you're miffed about this. Yeah. So look, just to be clear in terms of framing, this is simply about the process that led up to a budget in which the chancellor raises taxes by 26 billion pounds this is not about you know the wider health of the public finances and you know obviously there are just some continuing big issues around whether it's sustainable for debt to be at almost 100 you know government debt to be at almost 100 of gdp and you know the rate at which the government is borrowing each year.

1:41This is about essentially conditioning expectations through the media in the City of London, among investors, about what to expect in the budget. And so I'm going to take us back to the end of September. On September the 23rd, I actually wrote a blog and did some broadcasts around a review that the Office for Budget Responsibility was doing. So just to remind you, the Office for Budget Responsibility is the government organisation, which is separate from the Treasury, which is supposed to be independent of the Treasury, which assesses whether the Chancellor's tax and spending plans are in line with her rules for keeping debt and borrowing under control.

2:30So one of the things I learned was that the OBR had been conducting this review of the so-called supply side of the economy. And it had come to the conclusion that productivity, that's output per hour worked, output per unit of capital, was going to be lower than it had been expecting. When productivity is lower, growth is lower, and therefore tax revenues are lower. And as a result of this review, what I understood was there would be a hole in the budget of at least 20 billion pounds. And that meant that taxes would have to go up really very significantly if the Chancellor was going to continue to meet her fiscal targets for reducing borrowing and keeping the debt under control.

3:18After I did that, there were other reports by other journalists and they all focused on this problem this enormous headache for the chancellor of this productivity downgrade uh done by the OBR and the treasury and indeed the chancellor were on the record saying don't blame me for this hole this is all the result of the terrible policies of the previous government, the only reason productivity has been downgraded is because broadly the previous government, through austerity, through the wrong sort of policies, undermined the productive base of the country. So she was sort of acknowledging that it was a huge hole and blaming the last lot.

4:07And as a result of that story, as I say, picked up everywhere, you then get a lot of discussion about what's going to happen. Right. And so it's a few weeks later, you know, I and other journalists start to report that one of the things she's thinking about doing is breaching her manifesto pledge not to put up the basic rate of income tax. Right. And as you'll remember, you know, reports start to emerge that they are planning to put up the basic rate of income tax by actually two pence in the pound, which would have raised really quite a lot of money, but was also politically highly contentious because it would be an explicit breaking of a promise that they made in their general election manifesto not to put up the rates of income tax.

4:59Yeah. And it's just worth reminding everyone, this was, you know, you guys brought into to a press conference, weren't you, where you were basically told that she was going to have to make difficult tax decisions like that because of, you know, the OBR's forecast, essentially. That was the kind of reason that was given about it because of this productivity downgrade in their forecasts. And that was kind of explicitly said, wasn't it, in that presser? Yeah. So on November the 4th, the Chancellor did something which genuinely has never happened. It's certainly in the 35 odd years, at least 35 odd years that I have been covering the run up to budgets, the budget process.

5:52Right. She convenes a sort of emergency press conference, which happens in the press conference room in Downing Street. As I say, this is on November the 4th. And whether you're a political editor or an economics editor, you know, we all thought this was slightly shocking. Right. Because, you know, it was obviously an emergency. You don't because no chance had ever done this before in the press conference. She doesn't say explicitly the income tax is going up, but she does talk explicitly without giving the numbers. She talks explicitly about the productivity downgrade by the OBR and blames the previous government.

6:29And she talks about a whole series of other things going on in the world that were depressing economic activity like Trump's tariffs. And she just creates this climate that things are are terrible and taxes are going to have to go up massively. And so that's on November the 4th. And then from memory on November the 10th, She does an interview with a presenter at the BBC called Matt Chorley, in which she more or less doesn't quite say the basic rate of income taxes is going up. But the words that she uses certainly imply that that is indeed what is happening. Now, then you have to fast forward.

7:19I think it's about a week after that. I haven't got the date precisely in my mind, but there is a leak to the Financial Times, which says there is going to be no increase in the basic rate of income tax. that there's been a U-turn. They've decided in the end that it's too risky to breach their manifesto promise and that thresholds are going to be frozen, income tax thresholds, which is a sort of backdoor, some would say slightly dishonest way to raise income tax, because it still loads a load of tax on people. But it's not quite as easy to see as putting up the rate of income tax. So this is the FT, very good, strong, exclusive story.

8:17That was on November the 13th. So it was the night of November the 13th that the FT reported that the Chancellor had ditched plans for an income tax rise. At that point, journalists like me, and including me, ring up everybody we know at the Treasury in Downing Street to find out what on earth is going on. And we all get the same briefing, right? The briefing we get is the reason why there's been this U-turn is because they have recently learned that the OBR has increased its projections for how much tax will be coming in from the existing tax base, right? And the reason they've increased their forecasts for how much tax would be coming in from the existing tax base is because wages are higher than expected and inflation is higher than expected.

9:23Obviously, if people have got higher wages, they pay more income tax. If goods have gone up more than expected, you get more VAT. There's a whole variety of ways in which when prices and wages are rising, you get more tax, right? So that is the explanation we were given. So just to summarise at this point, so November the 4th is when Rachel Reeves has got you all together to suggest that because of the OBR's forecasts, they are looking at having to increase its taxes substantially and there's this 2P on income tax that's being discussed, but not explicitly said. She never publicly, because obviously you can't do that.

10:03You can't, you know, it's a nod and a wink thing, which is what happens before. So that happens on November the 4th. And then by the 13th of November, that is when we get this U-turn. So, you know, in those two weeks. So then tell us what has really gone on, because what you found out is it's a very different picture when you find out when they did get information from the OBR. So very, very unusually, and this is unusual, the OBR has decided to tell us actually what it told the government about its forecast and when. And actually, if you look in the forward of, you know, it's it's here it is.

10:46This is the core. I've scribbled on the front. The core OBR document, which gets published on Budget Day. You carry it around with you everywhere. Which I obviously carry around with. And it's become a little bit more, I don't know where the word is notorious this year, but this is the document that online was leaked 45 minutes before the actual budget, before the Chancellor was on her feet. What has never in my experience happened before is the Office of Budget Responsibility, because I think it has been a bit uneasy about the idea that somehow maybe it's been leaking information. I don't know, but it decided to put on the record precisely what the Treasury knew and when.

11:35And this has come out slightly in dribs and drabs. But then they pulled it all together in a letter to the chairman of the Treasury Select Committee, Dame Meg Hillier. And I've got it in front of me. It's you know, it was we're recording on a Friday and it was published this morning. And it is genuinely jaw dropping, actually, given the narrative, given the sequence of events that I have just told you. So the first thing to say is that they'd actually conducted their so-called annual supply stock take and transmitted the conclusions of their productivity review to the Treasury on the 7th of August.

12:24right 7th of august i'm talking about it at the end of september on the basis of of of what i found out from my own investigations and it says that on the 7th of august it informed the treasury that they would be reducing their central forecast for underlying medium term total factor productivity growth by 0.3 percentage points and it says we didn't revisit that 0.3 percentage point reduction at any subsequent point in the forecast process. We published no information. So that was set in set in stone. Right now, they also say that it was included in the round one forecast for the economy transmitted to the Treasury on the 17th of September.

13:12Yeah. And the round one forecast for the public finances, that is whether or not she meets our fiscal rules on the 3rd of October. And it says the round one forecast was a full forecast and therefore also included increases. And this is the bit where my sort of jaw dropped when I read this. It was a full forecast and therefore included increases in real wages inflation, which offset the impact of the productivity downgrade on receipts. Right now, Now, let's translate that into numbers. Right. And we can translate that into numbers because they have very, very helpfully provided a table showing the precise margins by which on different dates they told the chancellor whether she was hitting or missing her targets.

14:12And the first thing, therefore, to say about all of this, this is going to be round numbers, broadly, the message that they delivered. And we now know they delivered this to the Treasury, you know, in September and early October. Right. That although there was a hole from the productivity downgrade, which in the final book, this great blue book is 16 billion, right? The amount extra that she's raising from taxes is almost double that. It's 31 billion pounds. So from the word go, right? This so-called productivity hole was massively offset by this massive jump in tax revenues. This simply wasn't, it simply wasn't a fiscal crisis, right?

15:14And you can see this, right? Because I'm now going to talk to you through everything that they knew. So can I just summarise, just to explain to people then. So just to be clear, what you're saying is, in October, Rachel Reeves knew that she was meeting her fiscal rules without actually needing to do anything. It's a bit more nuanced than that. So just just to give you the detail so that you can see what she knew when and then compare that with the climate that she was creating. So on the 26th of March at the spring statement, she had a current balance. She was meeting the deficit rule by nine point nine billion pounds.

16:00Right. That is the rule that says that you have to cover day to day spending with taxation. Right. And she was in five years time. She was nine point nine billion up on that. Right. There was a surplus. Right. And in terms of her debt rule, which is that the public public sector net financial liabilities has to be falling. They were set to fall on the forecast then by 15.1 billion. So that those were the margins by which she was meeting her rules. On the 3rd of October, the OBR told her that she was slightly missing her deficit rule to the tune of 2.5 billion, which is not a black hole. It's a small hole.

16:43Right. You know, it doesn't require twenty six billion pounds of tax rises. OK. And it wouldn't. Most people would have thought required a manifesto breaking cut in the income tax rate and the the debt rule. She misses by half a billion. Nothing. Right. But literally less than I mean, literally 17 days later, she gets her round two forecast. And nothing has changed other than they're doing slightly better calculations, apparently. And by that point, she's in surplus by 2.1 billion on the so you're not breaking the rule at all at that point on the 20th of October. Either rule on the deficit rule, she's beating it by 2.1.

17:25And on the debt rule, she's beating it by 5.8. And then on the 31st of October, these are all assessments made on the basis of her not raising any taxes or cutting spending. These are what's called pre-measures forecasts. Right. So on the 31st of October, the deficit is is in balance to the tune of four point two billion. And the debt is in surplus to the tune of eleven point one billion. So little small declines from where she was in March. Now, the point is, you know, against that backdrop. Yes. OK, she'd probably want to put taxes up a bit. Right. And as you and I have discussed on this podcast, I mean, actually, I did think that she was taking way too much of a risk having so little headroom, 9.9 billion, 15.1 billion back in March.

18:17And I did think that it would be prudent to rebuild the headroom to bigger levels, which, in fact, she did when it came to the budget. But the point the point I'm making is these are just choices that any chancellor would make. You know, you would just say to the country, you know, things are going a bit better, but but I still want to protect you against future shock. So I'm going to put taxes up in order to build the headroom so that we're on a more secure. But what you don't have to do, which is what they did, which is create this idea that there is this terrible fiscal meltdown. It's all the fault of the previous government.

18:57You know, it was this climate of fear that she created, which was out of all proportion to what the to what the OBR was actually telling her. And so just so just to be clear, at the time of her press conference, which created which sort of reinforced this climate of fear, she already knew that the surplus was going to be four point two billion on her main target because she was getting all this extra money in from her existing taxes. Yeah. So on that day when she made that unprecedented move of getting all the journalists together to tell the world her thoughts before the budget, which she didn't need to do, she knew at that point that things were better than we were all led to believe.

19:45So that begs the question, why? Why did she even bother with that press conference? Like what was the purpose of that? So all I can assume. OK, so we had, interestingly, on this point, we had Jim O 'Neill, influential economist on the podcast recently. I think it was when you were off. I think it's right at the top of the podcast. We're talking about at that point, we both expected the basic rate of income tax to be raised. And he actually says in the podcast, I went to see her in the Treasury and I told him that was the right thing to do. Right. And the reason why economists like him thought it was the right thing to do was because the nation's creditors, those people who those investors who buy government bonds, they've been quite negative about this government, particularly since the government didn't push through those welfare reforms.

20:50As you remember, Labour MPs rebelled against the Treasury's proposal to cut payments to people on a variety of disability benefits. And that was supposed to save, I don't know, six billion pounds or something. And it got it got thrown out. And the other welfare reform that got that got reversed was the abolition of the winter fuel payment. and so creditors to the UK looked at this government and just thought it can't take the difficult decisions that are necessary in order to restore the health of the public finances and because as I say these creditors the UK are a bit wary of the UK they you know are concerned that this is not a government strong enough to keep the debt under control this is a government that's been forced, therefore, to pay higher interest rates than it would otherwise do.

21:51Right. And so one of the reasons why a whole bunch of economists said it's it's not only a much cleaner, simpler way to raise money, to put up the basic rate of income tax than, for example, the great smorgasbord of changes that she announced in the budget, that it would also be a manifestation of a confident government, a government that was prepared to make the right decisions, even if, you know, some of her own, some of, you know, Stama's own MPs were going to be critical, even if some of the media was going to be critical, even if there was going to be a political for all because it was breaking a manifesto commitment, investors would have said, right, they're brave enough to do the right financial things and therefore we'll buy gilts, we'll buy government bonds, price will go up, interest rate will fall.

22:43And I think she was persuaded by that argument for putting up the basic rates of income tax, but for whatever reason, didn't feel confident in making that argument publicly. So I think one of the reasons they wanted this sort of climate of, you know, it's all a terrible crisis is because if it's a terrible crisis, then that is justification for breaking the manifesto. You know, in the city, there's this concept of material adverse change, which means you don't have to stick to the promises you've made if you're doing a deal of some sort. So I think one of the reasons they were creating this idea of there's a terrible crisis is to create this idea that there'd been material adverse change and therefore the promises they made in the election no longer held.

23:31But the point is there wasn't a bloody crisis. That's the point. So I have two questions. Has Rachel Reeves or the Treasury done anything wrong by not explaining that explicitly? And, you know, is it too strong a word to say a mislead us? I definitely felt when I saw the OBR's letter today, I did feel pretty misled by a whole series of conversations I had with people in government. So on a personal level, I have to say, and I mean, I don't say this out of any sense of, you know, oh, poor me or recriminations, But I'm saying it because I won't be the only one. So I suspect there'll be many journalists who feel sort of somewhat let down, shall we say, by some of the briefings and the climate that was allowed to be or not allowed to be created, that was created.

24:30Right. So that's one thing. But more importantly, this is, you know, more importantly, and we don't know the answer to this yet. The Treasury Select Committee is looking at all of this. Obviously, you know, the opposition, particularly the Tories, are criticising her very greatly for creating this misleading climate. It is for a company completely against the law to allow investors to continue to believe something about the health of a company that is not matched by the reality of what's going on. When a company knows that investors think one thing about a company and something else is is actually true, the company has to make a statement.

25:21And in particular, if there's been a big change in the fortunes of a company, but investors think the opposite has happened, then it is incumbent on the company to make a disclosure. And it is certainly against the rules for company directors to mislead shareholders and investors about what's going on. Right now, look, I'm going to put it like this. Right. Right. You know, I am not a big hedge fund and, you know, I'm not a big institutional investor. So I don't know how they feel about this. But so I don't know whether they feel themselves misled. But they had all the same information as I had.

26:05And I don't feel I had the picture. Now, whether or not the Treasury has broken the rules, whether the Chancellor has in some way as the head of the Treasury broken the rules, who knows? Right. But what I do think is, you know, the run up to the budget was chaotic in any in any case. And this climate of confusion, because there is no other way now of describing what happened, it's just bad for the reputation of the Treasury and the government. You know, this is not the way you prepare for a budget. Why do you think it's now that the OBR have told us all this? Like, why didn't they say at the time when they could see what racial racism?

26:55Because they're not allowed to. So why now then? I think because they are just concerned, rightly, that all of us think that they reached certain conclusions at times when it was not the case. Right. I mean, actually, I mean, I did say something that wasn't quite right, actually, I think at the beginning of this podcast. In that initial blog that I wrote where I talked about the productivity black hole. Right. I said that the downgrade was not point two of a percentage point. Right. And actually, it is the case that a few weeks later, I can't remember. Another journalist wrote that it was a not point three percentage point downgrade.

27:47Right now, it is it is interesting to me that in this letter that they've written, they say that the downgrade was always not point three percentage points. And that I presume what they're saying there is whoever told me that it was not point two should have known better that actually was not point three, that they never changed. I just think they want people to know that the Chancellor and the Treasury had all the material facts as long ago as the end of September and early October. And because I think they don't want to be accused of being flaky and changing their minds. But there's another really interesting, really, really interesting thing about this letter.

28:36The very first paragraph of this letter, also in the context of the sort of why are they putting this out now? This sentence is extraordinary. Right. So it begins and it's written to make earlier by Richard Hughes, the chair of the OBI. And it says, given the unusual volume of speculation on the subject prior to budget day, i.e., when he's saying the subject, essentially, it's a question of their forecast. So he's basically saying, given the unusual volume of speculation about their forecast that took place prior to budget day, I'm taking the unusual step of writing to the Commons Treasury Select Committee to set out the facts concerning the evolution of the OBR's pre-measures forecast over the course of the past four months.

29:26Now, I have actually deliberately left out a very important phrase from that sentence. After he says, I'm taking the unusual step. The next thing he says is with the agreement of the Treasury. Right. So which is now I'm it's interesting to me which bit of the Treasury gave them license. Yeah, because I am. So the question for me is who was asked at the Treasury? If it was the permanent secretary, the sort of non-political bit, you know, I read that and I thought, oh, that's interesting. I wonder if the non-political bit of the Treasury, you know, the permanent secretary, has also been embarrassed by all this speculation, also thinks that a lot of it has been misleading.

30:14And doesn't mind if attention now turns to the Chancellor and the political side of the Treasury. There is a sort of, I mean, you know, a sort of yes minister element to all of this that is absolutely riveting. But can I just two things I want to quickly ask that don't need big answers. But first, is this not just the OBR going, yeah, OK, we cocked up that day, but look at what the Treasury's been doing. Never mind getting rid of us because one of us, you know, never mind shouting at us because we sent out the document 45 minutes early. Look at what they've been doing. Is it not like Richard Hughes, saving his ass?

30:53The reason why I think it may not be, right, is because I think he already decided to do this before there was the leak of the report. And in fact, the opposite is the reason this letter is now being published. Is because he had said to Meg Hillier, because I imagine she's also concerned about these these leaks, some of which turned out to be wholly misleading. He'd already said to Meg Hillier, the chair of the select committee, that he was going to set out this timetable in a letter. And what actually happened yesterday, which was very interesting, was that Meg Hillier made a public statement.

31:45And said to the OBR, you promised me a letter sending out the timetable where the flipping heck is it. Right. So she asked, she she actually said. And as I understand it, Richard Hughes didn't put the letter out originally and didn't send it to her because he didn't want to be accused. of distracting from his own humiliation about the fact that he couldn't keep, you know, his own report. This is the thick of it. It really is. It's just the whole thing. Yeah. I mean, it is just unbelievable. Can I ask a final question just to wrap things up then? What does this all mean for the state of our finances now?

32:23Like what does, where are we at? Like what, what, what does any of this mean for just us? So look, we've talked a lot about, we've already analysed the budget once in terms of what she actually announced. We've got a podcast coming up with Dan Needle, and we'll get into some of the nitty gritty of that with him. We'll come back to this is a very complicated budget. We're going to come back to, you know, whether these measures are good or bad. I think time and again, the significance of this is just about whether you have confidence in the integrity of the process that leads up to these decisions that affect all our lives.