British Labour’s obsession with fiscal rules is untenable and ignores the reality of the situation

I have been a consistent critic of the way in which the British Labour Party, both in opposition and in government, is obsessed with rigid fiscal rules, thinking it is the only way that it can demonstrate fiscal credibility (whatever that is in their minds). The result is that they get cornered into situations that either lead them to make poor decisions which lose them votes and give the likes of Nigel Farage more fuel for his crusade or they are forced to admit they cannot achieve the (unachievable) fiscal rules. Either way it is a clusterf*)@. In the last week or so, we have witnessed the ludicrous situation of the British Office of Budget Responsibility failing to protect its own file systems and leaking information before the Chancellor presented her official fiscal statement. The leaked information just happened to contradict the messaging of the Chancellor which was a bit inconvenient. But the important issue that all this raises is not whether OBR can run a secure WordPress site (evidently it cannot), but that the information it generates is so inaccurate and systematically biased that it cannot realistically be used as the basis for assessing fiscal policy. Which means that the obsession with the fiscal rules leads to policy changes that damage things that matter – such as employment and services – but those policy changes are based on information (OBR forecasts) that subsequent revelations tell us would not justify those policy shifts. As I said – clusterf8x@.

OBR can’t run a secure WordPress site!@

The Chairman of the UK Office of Budget Responsibility (OBR) was forced to resign on December 1, 2025 a

His explanation is outlined in – Richard Hughes letter of resignation.

The issue was that OBR published its latest – Economic and fiscal outlook – on November 26, earlier than planned, which gazumped official announcements by the Chancellor on several contentious fiscal decisions.

The Chancellor had been claiming that in the lead-up to her fiscal release that income taxes would have to rise because the economy was flagging and that was compromising the revenue they were relying on to meet the ‘fiscal rule’ targets.

However, the mistaken earlier publication of the document confirmed that there would be a ‘three year freeze on income tax’, thus calling into question the Chancellor’s honesty and transparency.

The OBR error was down to sloppy management of its publication system, which is surprising (the level of incompetence) for such a sensitive document.

A WordPress plugin was able to be bypassed and a file directory did not have the correct permissions applied which meant anyone could download the file.

The funny thing is that the government was so intent on engendering an image of the OBR being ‘independent’ that it allowed it to bypass the usual secure government publishing platforms, and, instead, rely on a flaky WordPress plugin for confidentiality.

Amazing.

The real problem

However, the issue in my view is not whether the Chancellor was deliberately intimidating the British public with talk of income tax rate increases when she knew the fiscal statement contained no such measure.

I think her track record is one of bullying and intimidation anyway – sprouting the so-called sacrosanct nature of the fiscal rules when she knows full well they are not understood by the public and are just structures that allow her to hide behind and play the TINA card for damaging policies.

The real issue in this regard is that the fiscal rules are conditioning policy choices yet they rely on forecasting accuracy because the OBR calculates the so-called ‘fiscal headroom’ that the Chancellor likes to parade with as if it is a concrete and down-to-the-last-penny aggregate.

The fiscal statement was published by the Treasury on November 26, 2025 – Budget 2025 in full.

In her speech to the Commons (November 26, 2025) – Budget 2025 speech – the Chancellor used the term ‘headroom’ twice, boasting how the government would “more than double the headroom” that they had available.

She said that:

While the current budget balance is in deficit by £28.8bn in 26/27 and £4.6bn in 27/28 …

… it moves into a surplus of £3.9bn in 28/29, £21.7bn in 29/30 and £24.6bn in 30/31 …

… more than doubling our headroom against the stability rule and meeting that rule a year early too …

Madame Deputy Speaker, I said we would cut the debt and we are – with debt down by the end of the forecast.

The point is that these figures are all forecasts yet current policy decisions are being made on the basis of them.

Governments have to operate in this way given they have to calibrate their interventions based on uncertainty.

The problem is overlaying that uncertainty with rigid fiscal rules – the Chancellor repeated to the Commons her often-stated mantra – “Those fiscal rules are non-negotiable.”

While the British government boasts it is “doubling our headroom” the whole concept of ‘headroom’ (the difference between projected fiscal outcomes and the outcomes permitted by the ‘non-negotiable’ fiscal rules) is empirically hazy and not a suitable basis for declaring fiscal success.

Forecast accuracy

How accurate are the fiscal estimates in the UK?

Answer: Not very.

The OBR releases annual forcast evaluation reports (FER) which examine “how our forecasts compare to subsequent outturn data and identifies lessons for future forecasts.”

The most recent publication was the – Forecast evaluation report – July 2025 (published July 1, 2025).

If you go to the – Forecast evaluation report – July 2025 – page, you can also access all previous reports as well as the several “Supporting documents”, which are, in fact, a series of Excel spreadsheets containing useful data.

In August 2023, the OBR published Working Paper No. 19 – The OBR’s forecast performance – which “takes a comprehensive look at the OBR’s overall forecasting record since we were established in 2010, comparing our economic and fiscal forecasts against those of external UK forecasters, the Bank of England, other official forecasters in Europe, and the official UK forecasts produced by the Treasury during the 20 years before the OBR was established.”

This is a very comprehensive discussion of the history up to the time of publication of the OBR’s forecasting performance.

The two key findings of that retrospective review was that:

… the OBR has tended to overestimate real GDP growth and underestimate government borrowing over the medium term, with the latter due mainly to a tendency to underestimate the medium-term level of government spending.

They also acknowledge that:

… our borrowing forecasts tend to be less accurate beyond the first year of the forecast … the UK’s borrowing forecasts are less accurate than the average beyond the first year.

Even so, they state that their failings and biases are lower “than the previous UK official forecasts produced by the Treasury”.

So doing badly better!

The point I emphasise is that all forecasting is prone to errors given the uncertainty about the future and the complex confluence of events that determine that future.

Professionals who dabble in statistical and econometric exercises (including yours truly) realise that inaccuracy is intrinsic to the task.

What good forecasting models try to avoid is systematic errors (biased in one direction or another).

The IMF forecasts, for example, are usually biased in a systematic away to predicting less damage from fiscal austerity, that actually occurs.

Their work during the Greek bailouts during the GFC was nothing short of criminal – very inaccurate and biased in one direction.

The cost?

Tens of thousands of people being forced into unemployment and poverty!

Such inaccuracy matters.

In its most recent FER, the OBR notes in relation to net government spending that:

1. “In the March 2019 five-year ahead forecast, made before the Covid pandemic, we expected that borrowing in 2023-24 would be £13.5 billion (0.5 per cent of GDP). This was £117.6 billion (4.2 per cent of GDP) lower than outturn.”

Error = £117.6 billion (4.2 per cent of GDP).

2. “The March 2022 two-year ahead forecast for borrowing in 2023-24 was £50.2 billion (1.9 per cent of GDP), which was £80.9 billion (2.9 per cent of GDP) lower than outturn.

Error = £80.9 billion (2.9 per cent of GDP).

The situation in relation to the OBRs GDP forecasts (upon which fiscal forecasts are dependent) is no better.

The most recent FER found that:

1. “On average, our forecasts have underestimated annual real GDP growth at the one-year horizon by 0.4 percentage points but overestimated it by an average of 0.7 percentage points at the five-year horizon.”

2. “On a cumulative basis, we have overestimated five-year cumulative real GDP growth, on average, by 2.2 percentage points, with all but two of our cumulative five-year GDP forecasts exceeding eventual outturn.”

So systematic bias on display.

Certainly there were “three large shocks” during the forecasting horizon – COVID, Energy prices, then inflationary pressures.

Even if we exclude the pandemic effect, the inaccuracy and bias is still significantly large.

Errors of this magnitude means that all the other variables that are sensitive to economic growth are similarly poorly forecast.

So given the bias tax revenue will be overstated over the 5-year period and welfare spending will be understated over the same period, which means the fiscal balance forecast will systematically err on the side of low.

And a Chancellor who is obsessed with achieving these fiscal rules and uses the concept of headroom as a summary measure will tell the public that things are going well and the impact of her austerity policies designed to achieve outcomes that fit within the forecast ‘headroom’ are not all that severe.

When the reality is quite markedly different.

But compare the size of the errors with the Chancellor’s fiscal outcome projections above (alleged fiscal surpluses of £3.9bn in 28/29, £21.7bn in 29/30 and £24.6bn in 30/31) and you see the problem.

There is no way she can assuredly claim that the ‘fiscal rules’ are being met and that the government is ‘doubling the headroom’ based on the OBR forecasts, which have demonstrated errors out of all proportion with the fiscal projections.

Which leads to the conclusion that the austerity that the British government is claiming justification for based on the ‘headroom’ projections and the non-negotiable fiscal rules is unjustifiable.

The fiscal rules are pantomine and are being used as smokescreens to justify austerity.

Better indicators of progress

The point is that:

1. The government cannot control the fiscal outcome anyway, which is in no small way determined by the spending and saving decisions of the non-government sector.

When private confidence is high, private economic activity increases and tax revenue rises and welfare spending falls – via the so-called automatic stabilisers.

The fiscal deficit declines as a result.

However, when the government tries to engineer a decline in the fiscal deficit through austerity measures they usually end up undermining private confidence and as a consequence, economic activity declines, tax revenue falls and unemployment rises – pushing the fiscal deficit up.

Self-defeating in other words.

Focusing only on the fiscal balance as a result of an obsession with achieving pre-defined fiscal aggregates (to satisfy fiscal rules) is a sure way to not only breach the limits set by the rules but also to cause damage to things that matter like employment growth etc.

2. The government cannot accurately assess the trajectory of the fiscal aggregates anyway at a time they are making major decisions which impact on that trajectory.

This is evident in the inaccuracy of the OBR forecasts.

If the British government was smart it would abandon its focus on the fiscal aggregates and concentrate on improving peoples’ lives.

And they have very immediate and consistent indicators to tell them how things are going.

The British Office of National Statistics publishes monthly – Unemployment – estimates, which tell us that the policy environment since 2022 has been remiss.

In June 2022, the official unemployment rate in Britain was 3.6 per cent.

British Labour assumed government office on July 5, 2024 and at that time, the official unemployment rate was 4.1 per cent.

The most recent estimates for September put it at 5 per cent and rising.

Since Starmer and Reeves took over, unemployment has risen by 308.7 thousand.

There is no uncertainty about that figure.

In three years time, ONS will not be admitting massive forecast errors in the same way that the OBR admits every year.

An extra 308 thousand British workers are now without work in the 16 or so months that Labour has been in office.

There are other indicators relating to vacancies, wages, etc – things that actually impact on peoples’ lives – that have gone south under this government.

And while Ms. Reeves was berating the Commons about the ‘headroom’, she didn’t mention unemployment once in her speech.

Conclusion

The obsession with these fiscal rules is damaging and would be laughable if the consequences were not so serious.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.