The UK has repeatedly overshot budget forecasts since the financial crisis, driving up public debt and casting a shadow over Rachel Reeves’ vow that she will be the chancellor who finally eliminates the deficit.
The Office for Budget Responsibility has delivered 21 fiscal projections since 2010 that can be measured against the actual outcome half a decade later. In all but one, the full-year current budget balance was worse than expected, the Financial Times has found.
It is too soon to judge whether the 10 most recent twice-yearly OBR fiscal outlooks will come good over the full five-year horizon, but signs again show the government is off track.
Shocks such as the Covid-19 pandemic have heavily affected the poor fiscal performance, but successive governments have also failed to keep spending in check and drive economic growth, according to analysts.
Chancellors repeatedly tell the OBR they will meet their fiscal rules by making more painful cuts later in their tenures while hoping growth will rescue them, a pattern Reeves is at risk of repeating in her spending review on Wednesday, they said.
It’s “jam today and pain tomorrow”, said Ruth Curtice, a former senior Treasury civil servant now at the Resolution Foundation think-tank.
Reeves adopted the current budget balance — which excludes borrowing for investment — as her key fiscal target in October and it is too early to judge whether she will hit her goal of balancing the books from 2027-28.
All of her predecessors since the OBR was created in 2010 were Conservatives. Labour came to power promising fiscal responsibility.
On Wednesday Reeves will detail frontloaded spending plans that entail tighter budgets later in the current parliament, fuelling fears that her plans will slip as she tops up expenditure.
Real day-to-day departmental spending growth is set to jump by 4 per cent in the current fiscal year before falling to 1.9 per cent next year and 1 per cent after, according to existing plans.
The chancellor’s U-turn on cutting winter fuel payments, which has left a £1.25bn-a-year hole in the public finances, underscored concerns about spending restraint, economists said.
“When it comes to the delivery of spending cuts, I’m not sure there is a lot of market faith that they will follow through,” said Cathal Kennedy, senior UK economist at investment bank RBC Capital Markets.
Britain’s higher than expected deficits partly stem from unexpected shocks that have jolted the economy, including a surge in energy prices and Brexit. The most dramatic was the pandemic, which crushed output and triggered an explosion in public debt across the world.
But key features of the UK’s fiscal framework have exacerbated the problem, said Curtice, including a tendency to set targets well into the future — sometimes as many as five years — leaving plenty of time for slippage.
“To the extent this feeds some bond market scepticism it also represents an opportunity,” Curtice said. “If a government can improve the UK’s reputation for achieving fiscal plans there is the potential for payback in lower borrowing costs.”
In a review of its own forecast performance in 2023, the OBR said it had a tendency to overestimate real GDP growth and underestimate government borrowing over the medium term. This is partly because the body has often underestimated spending; it has to base estimates on information from the Treasury. It also stems from the OBR’s overly optimistic productivity estimates.
Reeves has vowed to turn the page on previous fiscal blowouts by targeting a current budget surplus on a narrowing time horizon, with the initial five-year window compressing to three years during the parliament.
This will help improve the credibility of the UK fiscal regime, say economists. But Reeves is vowing to meet her key rule by only a tiny margin of “headroom” of £9.9bn, leaving her exposed to adverse economic events.
UK current budget balances have been worse than forecast on a half-decade horizon in every OBR forecast where outcomes are available, barring the outlook published in March 2013, when the forecast horizon ended in 2017-18.
A similar dynamic can be seen in some recent forecasts, although the five-year mark has not been hit. For example, the OBR in March 2022 predicted the UK would achieve current budget surpluses as soon as 2023-24 and 2024-25, but government instead remained in the red for both years.
The UK has had a tendency to overshoot external forecasters’ predictions as well.
The IMF predicted Britain would reach a primary budget surplus — which excludes interest payments — by the end of the forecast period in each of nine April projections up to 2019, including those with the last year falling before the pandemic, according to its regular forecasting rounds.
Instead, the UK has not reached a primary surplus for more than 20 years, with the last surplus, of 1.8 per cent of GDP, achieved in 2001.
The IMF temporarily froze its five-year forecast in April 2020 because of the uncertainty caused by the pandemic. It is too soon to say if its more recent predictions for a return to surplus will be borne out.
“The reality is that it is very hard to make any fiscal forecasts, when so many large once-in-a-century shocks happen,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price.
However, he said if no large, unexpected economic shocks occurred in the next couple of years, “the chances . . . are good” that the UK would finally achieve a primary surplus.
Running budget deficits helped the UK gross government debt, or borrowing accumulated over time, rise to more than 100 per cent of GDP after the pandemic, well above that of the EU, according to IMF data. The UK had a smaller public debt-to-GDP ratio than the EU until the mid-2010s.
The Treasury said: “The fiscal rules are non-negotiable. We put them in place to create stability, and support investment. We’ve seen what happens when fiscal rules are put to one side, and we are not going to put the nation’s finances at risk.”
The OBR declined to comment.
Data visualisation by Alan Smith
