OBR cautions over ‘fiscal smoke and mirrors’ after Chancellor’s Budget

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The chairman of the Office for Budget Responsibility (OBR) has suggested the Government’s Budget last week was “responsible” but hinted that “fiscal smoke and mirrors” may have been used to meet fiscal requirements.

Richard Hughes and other members of the fiscal watchdog faced questions from MPs on the Treasury Select Committee over last week’s tax and spending plans announced by Chancellor Jeremy Hunt.

Following the Budget, the OBR said spending plans, such as an increased childcare provision, meant Mr Hunt has the lowest chance of meeting his required fiscal rules since the OBR was set up in 2010.

The UK’s current fiscal rules include a requirement for public sector borrowing not to exceed 3% of GDP in the next five years.

Last week, the OBR said Mr Hunt only had around £6.5 billion in headroom in order to hit the Government’s targets.

On Wednesday, OBR chairman Mr Hughes told the Treasury committee: “It was a responsible Budget in the sense that the Chancellor was still on track to meet the targets he set for himself.

“As we highlighted in the report, and there was some discussion in the commentariat, there are a growing number of what you might call fiscal illusions, fiscal smoke and mirrors.

“There are a growing array of tools that chancellors use to get around some of those rules.

“This committee has highlighted the issue around what assumptions we have to make about fuel duty, for example, where the Government insists it will uprate it by RPI (retail price index inflation) and the Government has frozen fuel duty every year since 2011.”

The session came hours after the Office for National Statistics (ONS) revealed that inflation surprisingly increased to 10.4% last month.

In their Budget forecast, the OBR projected that inflation would drop to around 2.9% by the final quarter of 2023.

David Miles, member of the budget responsibility committee at the OBR, said it could still fall lower than this despite the latest ONS reading but highlighted significant uncertainty.

When asked how confident the OBR can be that it will hit 2.9% in the fourth quarter, Mr Miles said: “I don’t think one can be very confident – it’s a central forecast.

“Just as an indication of how quickly things are moving, in the three weeks since the beginning of March, the wholesale price of gas is down something like 15%. Oil prices are down quite a lot too.

“If we were doing the forecast right now, based on the future price for gas and where the oil price is, even though this morning’s inflation figure was higher than what we thought, our forecast figure might even by lower than 2.9%.

“It’s an indication over the substantial degree of uncertainty.”

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