Rachel Reeves risks getting caught in 'doom loop' with OBR-focused policies

Immediately journalists start to pore over the OBR’s figures to check whether the Government numbers add up.

Yesterday, OBR’s tome was far larger than the Treasury’s slim green spring statement, perhaps subliminally indicating its importance.

Brought in by George Osborne in 2010 to scrutinise budgets, the watchdog gained reverential status after Liz Truss’ mini-budget, when she sidelined the OBR with spectacular consequences.

As such, now Richard Hughes and his impartial team of economists have a huge say on the success or failure of Governments.

This has forced chancellors to spend their time ensuring that they comply with fiscal rules and their figures match up with the watchdog’s forecasts (which aren’t always correct).

This is largely what yesterday’s spring statement was, an exercise in Rachel Reeves ensuring she conformed to her and the OBR’s rules.

There were limited announcements beyond the focus on defence, which was predicated by the Prime Minister’s declaration that the Government would spend 2.5 per cent of GDP.

It now appears as if the welfare reforms were created to ensure Ms Reeves hit her fiscal rules, after any headroom was wiped out by increases in the cost of borrowing and stagnant growth.

One MP said the Government was more focused on “making the numbers add up rather than starting with the reforms and then assessing the costs and savings”.

With the power of the OBR and stagnant growth, there’s a risk this type of policy making continues.

If Ms Reeves is reluctant to raise taxes again, we may see a series of fiscal events with departments seeing their budgets salami sliced again and again.

If you put this to Mr Hughes, chair of the OBR, he would say the issue is chancellors leaving “tiny” amounts of fiscal headroom.

Policy changes are "driven by the fact that chancellors tend not to achieve their fiscal rules" rather than OBR whims, he told journalists yesterday.

Either way, Ms Reeves is at risk of descending into a doom loop where any headroom constantly gets wiped out leading to cuts.

The risk is only heightened by the potential of tariffs from the US.

In fact, Ms Reeves’ budget surplus could be wiped out next week if Donald Trump does indeed put 20 per cent tariffs on the UK.

The OBR said the most “severe” scenario, in which the UK and other nations retaliated to the imposition of tariffs, would see GDP 0.6 per cent lower than forecast this year and 1 per cent lower next year.

This scenario would “almost entirely eliminate” the Chancellor’s £9.9bn headroom against her fiscal rules, potentially forcing her to implement further spending cuts or tax rises.

Ms Reeves was right to mention “global uncertainty” and she’ll be hoping it doesn’t push the UK economy into the “doom loop” that some fear.