The OBR’s damning Budget verdict gives the Tories ammunition for years

Labour pledged its devotion to the guardian of fiscal rectitude. It is about to face the consequences

Seldom has a budget come apart so quickly. It’s not that Rachel Reeves will be forced to take farms out of her new inheritance tax scheme, although that may well come. Nor will Labour rebels force her to abandon any tax rises: a government with a majority as large as Keir Starmer’s can do anything it wants. But her main claims – to be boosting growth, repairing the public finances and getting Britain working again – have been methodically and mercilessly shredded. The markets, it seems, have noticed.
The Chancellor’s adversary is not anyone in the Conservative Party but Richard Hughes, a softly spoken American who runs the Office for Budget Responsibility (OBR). He has put each of her main arguments to the test. What will all of this borrow-and-spend really accomplish? Will those “working people” be better off? By the end of the 200-page report on her Budget, not much remains of the arguments with which Starmer and Reeves fought the last election.
Let’s start with the most obvious: that “working people” don’t suffer from an increase in employers’ National Insurance. Companies, of course, cannot pay tax. Only people can. The OBR report doesn’t just explain this but gives the breakdown: 75 per cent of this “employers’ National Insurance” will be borne by workers in the form of lower wages and the rest in higher prices.
Once, this would have been a point made to a half-empty auditorium by a lonely free-market economist. Now, thanks to the OBR, it’s mainstream. Reeves is now being asked by national broadcasters whether workers will bear the cost of the National Insurance rise. She’s having to accept that they will. This will likely be just the start of the tough questions she’ll have to answer as the rest of the OBR report sinks in.
During the election, we were told that the first of Labour’s five missions was to “secure the highest sustained growth in the G7”. But the OBR finds no Reeves growth effect: not by the next election anyway. But it gets worse. Net migration is forecast to settle at an annual 350,000, equivalent to a city the size of Sunderland every year for the foreseeable. So GDP per capita will grow by a desultory of 1.2 per cent a year, on average, for the rest of the decade. The United States, by comparison, is expected to manage 1.7 per cent.
All this might be easier to swallow if accompanied by fiscal or social repair. One of Starmer’s most ambitious and laudable goals is commitment to taking the employment rate to an all-time high of 80 per cent. This would need serious welfare reform and an end to the appalling practice of writing off thousands of people every day as long-term sick. But it seems this has also been abandoned.
Instead, tax rises have been concentrated on the low-paid. This will hit the overall employment rate, now forecast to go down even faster than before. To govern is to choose, and Reeves has gone for tax over employment.It will also be hard for the Chancellor to keep talking about putting public finances “on a sustainable footing” now that the OBR has shown that she is borrowing £140 billion more than the Tories had planned to. In today’s debt markets, such fiscal irresponsibility carries a cost.
The OBR spells it out: her Budget will push up borrowing costs, bank rates and inflation – meaning she’ll have to pay £5.5 billion in higher debt interest alone. It rises to £10 billion when factoring other the effects of raising rates.The OBR even spells out a Reeves effect on mortgages. They’ll go up if (as it explains) her debt splurge nudges up Bank of England rates. The impact sounds small, at a quarter-percentage point, but works out at £450 a year for the average borrower. Add the National Insurance increase and it leaves disposable incomes even lower than it had previously forecast. At this point, it starts to become hard to see who is being helped in this Budget.
But all such difficult decisions, Reeves argues, are necessary to give business the confidence to invest after years of Tory chaos. Here, the OBR is perhaps the most devastating: her tax take and state spending levels are so high as to “crowd out some private investment in an economy with little spare capacity.”
And not by a trivial amount, either: the biggest factor in the OBR’s growth downgrade for 2029 is its fear that there will be less private investment than originally thought.
This is the precise opposite of what Reeves had promised.
So where does this leave us? For months, the Chancellor has pledged to take tough decisions to steady the financial ship, going all-out for growth.
Now, we see the pound falling and gilt yields shooting up towards Liz Truss levels as markets adjust for the possibility that, all along, there never really was a plan. Reeves might say (as Rishi Sunak sometimes did) that the OBR is too pessimistic. But she has gone out of her way to defer to its judgment, passing laws to increase its powers and using it as a stick with which to beat the Tories.
In government, the Tory ministers cursed the OBR’s refusal to go along with their cheerful predictions. But now, the OBR has just given the Conservatives as much ammunition as they could ask for to point out flaws in Reeves’s borrow-and-spend agenda. Its verdict should also give Labour early warning of economic failure – and give it a chance to start reforming.
The OBR’s warning about “crowding out” (a phrase it repeats 16 times) makes a bigger point: more workers are needed to grow the economy. Perhaps four million potential workers are ready to come off benefits with the right package. Hammering the low-paid with taxes may turn out not to be the package. As Liz Kendall points out, Britain won’t start growing again if people won’t start working again: without welfare reform, there can be no serious growth.
So Labour might change course. But if it doesn’t, then the job of the new Conservative leader – who will be chosen by the party on Saturday – has just got a lot easier.