Labour peer tells Reeves not to use headroom as ‘piggy bank’

A Labour peer has urged Chancellor Rachel Reeves to avoid using her larger fiscal headroom as a “piggy bank” to fund extra government spending increases. 

A report by senior House of Lords members said the Chancellor should add further protections to public finances, leaping to the defence of the Office for Budget Responsibility for improving transparency amid questions over its calculations and interference with policymaking. 

Lord Stewart Wood, an influential Labour peer who was a shadow minister under Ed Miliband’s leadership and now chairs the Economic Affairs Committee, said that criticisms of the OBR were “misguided”, adding that the Chancellor should avoid repeatedly tweaking fiscal rules for political purposes. 

But the committee advised Reeves to add another rule to reduce public sector debt as a share of GDP in the third year of a fiscal forecast window, which would be complementary to the Chancellor’s current rule that requires net financial debt to fall as a share of GDP by 2030. 

The committee’s report on the state of the OBR also said that Budget speculation has been exacerbated by the small fiscal buffers left by the Chancellor against a rule to leave a current budget surplus by 2030. 

Reeves left just £9.9bn in headroom after her first Budget, with small changes in forecasts by the OBR leading the government to announce new tax hikes despite promises it would not.

The Lords’ report said that the government should enlarge the size of the headroom to “reflect the unavoidable forecast errors in the OBR’s projections”. 

The two measures would together “add credibility” to the current fiscal framework operated by Reeves, according to Wood. 

“The fiscal framework is frail. The government’s behaviour must change with significantly larger fiscal buffers becoming the norm and these buffers not being used as a piggy bank that can be raided,” Wood said. 

“The frequency with which fiscal rules are changed has simply compounded the problem. If the government were ever to change the rules, it should do so following a consultation that would allow the costs and benefits of alternatives to be properly considered.”

Reeves should ‘rebuild fiscal resilience’

The 113-point report came as several former OBR officials, including its last chair Richard Hughes, and independent economists provided evidence on the health of public finances. 

Hughes told Lords that Reeves’ current rules were among some of the “loosest” used by any recent Chancellor.

He said they allowed public sector debt to rise and there weren’t many constraints on the government to rein in spending. 

“[The current rules] do very little to rebuild fiscal resilience at a time when we are now getting on to four years since the last major shock which hit the UK,” he said, referring to the energy crisis in the fallout of President Putin’s full-scale invasion of Ukraine. 

“We are at a significant fiscal disequilibrium despite the fact that we have moved on quite a bit.”