"Unlocking the Secrets of Liz Truss's Impact on Economic Policy and the OBR"

Liz Truss's brief tenure as prime minister has resulted in an unforeseen consequence: an unintentional strengthening of institutions she often criticizes. For example, the Bank of England now appears somewhat shielded from criticism, no longer having to fend off attacks from the highest levels of government. Simultaneously, there has been dissatisfaction among backbench MPs who believe that the government has shifted from neglecting the fiscal watchdog to treating it as an infallible oracle. Some argue that the Office for Budget Responsibility (OBR) is not just evaluating the government's work but essentially dictating it.


This tension highlights a growing division within the Conservative Party. On one side are those who prioritize fiscal responsibility in the aftermath of the economic toll inflicted by COVID-19. On the other side are those who advocate for aggressive growth strategies, seemingly unconcerned about the risk of jeopardizing the nation's finances. Truss herself has risen as a prominent figure, leading the right-wing Growth Group of backbench MPs, which champions tax cuts and deregulation and now counts 60 members, coincidentally the same number as the government's working majority.

Meanwhile, Richard Hughes, the OBR's chairman, and his team of 45 members continue their preparations for the Autumn Statement from their headquarters on the 14th floor of the Ministry of Justice, enjoying stunning views of Westminster, including the Houses of Parliament and Buckingham Palace. Recent plans by the shadow chancellor, Rachel Reeves, to enhance the OBR's authority, allowing it to publish updated forecasts with every government announcement of tax or spending changes, have added to its influence.


While some applaud these measures as a means to prevent manipulation of fiscal policies, others worry that they will restrict the government's flexibility and hinder radical agendas. Critics argue that listening too closely to the OBR might have exacerbated austerity measures under George Osborne and blinded successive chancellors to the opportunity of borrowing at low interest rates for crucial infrastructure investments.

Hughes, with a background in addressing economic crises in various countries, now faces the challenge of guiding the UK through a complex economic landscape marked by low growth, increasing fiscal demands, and high levels of tax and debt. Beyond short-term economic forecasts, the OBR is tasked with assessing the long-term implications of issues like climate change and debt interest payments. Hughes's role may make him one of the most powerful, albeit lesser-known, figures in the country.

To understand the rise of fiscal rules and the OBR's influence, we must delve into the early days of New Labour. Tony Blair and Gordon Brown, while in opposition, recognized the need to gain the public's trust regarding economic management, given the historical perception of Labour as spendthrift. Brown, as chancellor, implemented strict fiscal rules, limiting borrowing to investment and keeping debt under 40% of GDP. While these rules aimed to enhance accountability and market confidence, critics argue they can create perverse incentives and may be too rigid.


Brown's ability to manipulate these rules led to skepticism, and by the time he became prime minister in 2007, his fiscal rules were widely mocked. George Osborne, the subsequent chancellor, introduced the OBR to provide independent economic forecasts and assess the government's fiscal policies. However, he too struggled to meet fiscal targets. Between 2016 and 2020, most of the government's fiscal rules went unmet, with minimal consequences due to other pressing issues and low interest rates.

As global events unfolded, including the pandemic and Russia's invasion of Ukraine, fiscal concerns grew, and the UK's fiscal rules, abandoned in 2020, were reinstated in 2021. This resurgence of fiscal responsibility has boosted the OBR's clout as it forecasts the impact of policy decisions on the economy.

While the OBR is renowned for its independence and transparency, it remains unelected, inviting accusations of unaccountability and groupthink. Critics have also pointed to the OBR's past forecasting inaccuracies. Economic forecasting is a complex endeavor, with countless variables, making precise predictions challenging. Proponents argue that while forecasts may be imperfect, they provide valuable guidance.

Some contend that the OBR's current setup has shortcomings. It struggles to model the long-term effects of policy changes on the economy's supply side, potentially exaggerating the costs of tax cuts and benefits of spending increases. However, others argue that the OBR is open to evidence-based policymaking.

Another concern is the weight placed on the OBR's forecasts by policymakers and economists alike. Overreliance on the OBR's projections could hinder policy creativity and flexibility. Critics suggest that the real issue lies with the fiscal rules themselves, which have undergone multiple revisions and may not be effective in guiding economic policy.

In conclusion, Liz Truss's leadership has inadvertently elevated the role of institutions like the OBR in shaping economic policy. While fiscal rules and the OBR serve as important checks on government spending, there are debates about their effectiveness and whether they might stifle innovation in economic policy. The broader challenge remains the consensus on the UK's weak long-term growth prospects, which has far-reaching implications for fiscal policy and priorities.