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Chancellor Rachel Reeves is not expecting to get credit from the UK’s fiscal watchdog for her attempts to boost growth when it publishes its official forecasts next month.
Reeves is braced for a steep downgrade in the Office for Budget Responsibility’s growth outlook, which would blow a hole in her fiscal plans and force her to close the gap with billions of pounds of spending cuts or new tax rises.
Treasury insiders fear the OBR will take little account of various supply-side reforms announced by the chancellor in recent weeks in areas like planning, pensions or infrastructure, such as a third Heathrow runway.
One person briefed on Reeves’ thinking said: “We are absolutely confident that we are doing the right thing and that these things will create growth — it’s just that the OBR won’t score it.”
Sir Keir Starmer’s government has named growth as its top priority, so the OBR’s forecasts — which will accompany Reeves’ Spring Statement on March 26 — are likely to be politically painful.
Reeves has fallen into the red against her key fiscal rule, to get the budget into balance by 2029-30, as higher borrowing costs and weak growth put pressure on the public finances, according to people familiar with the OBR’s preliminary forecasts.
The figures mean the chancellor would need to raise more than £10bn if she is to restore the fiscal wriggle room she had at the time of the October Budget. Some analysts argue she needs to go beyond this as she seeks to secure credibility with the financial markets.
Officials have indicated that the chancellor will seek to curb spending rather than raise taxes, for instance through savings in the welfare budget.
James Bowler, Treasury permanent secretary, on Wednesday launched an inquiry into what he said was a “potential leak” of the OBR submission, first reported by Bloomberg, saying it was vital that the watchdog and Treasury ministers could discuss forecasts “in private”.
Reeves’ allies admit it is hard to persuade the OBR to positively “score” her supply side reforms, with the watchdog preferring to wait to see whether they actually happen and deliver results.
Former Conservative chancellor Jeremy Hunt said his experience with the OBR was that “they require a lot of evidence as to the impact of new policies before they are willing to bump up their growth forecasts”.
“The first time they ever did that for a chancellor was my 2023 childcare reforms but even then it was a lot less generous than we were hoping for.”
Ruth Curtice, a former Treasury official who now runs the Resolution Foundation, said: “The OBR have fiendishly tough criteria to score growth effects — which have to be big, proven and occur within five years. Most troublesome, they have to be clearly additional to what is already implicit in the forecast.”
Reeves is adamant she is doing the right thing in reforming areas such as pensions and planning, making it easier to build housing and new infrastructure projects such as nuclear power plants.
“We always knew this was going to be tough,” said an aide to Reeves. “Short term challenges are real and present but everyone we talk to is actually pretty confident.”
Mel Stride, shadow chancellor, said: “With the Bank of England predicting growth falling and inflation rising, it is clear that this chancellor needs to make urgent course corrections, before the damage she is doing to the economy becomes permanent.”
Economists expect the economic pressure to worsen on Thursday when fourth-quarter GDP data is published. The economy likely contracted by 0.1 per cent compared with the previous three-month period, after it flatlined in the third quarter.
The Bank of England halved its 2025 growth estimate last week, saying it expected the economy to expand by just three-quarters of a percentage point this year — sharply below the OBR’s prediction of 2 per cent.
The Ernst & Young Item Club, another forecaster, has predicted growth of just 1 per cent in 2025.
The BoE forecasts growth of 1.5 per cent in 2026, which is also below the OBR’s most recent prediction of 1.8 per cent growth.