No 10 denies Reeves misled over black hole as OBR letter challenges warnings

The Chancellor did not mislead the public or markets when she warned of difficult decisions needed to fill a black hole in the public finances, Downing Street has said.

There were warnings ahead of the Budget that Rachel Reeves could face as much as a £20 billion gap in meeting her self-imposed fiscal rule of not borrowing for day-to-day spending.

But a letter from the Office for Budget Responsibility (OBR) published on Friday revealed it told the Chancellor as early as September 17 that prevailing economic winds meant the gap would be much smaller.

It later informed her in October the spending gap had closed altogether.

Conservative leader Kemi Badenoch said the letter showed Ms Reeves had “lied to the public” and should be sacked.

The Budget on Wednesday followed weeks of warnings from Ms Reeves that she would need to make “hard choices”, including a period of time in which it seemed likely she would hike the headline rates of income tax to meet her tax and spending commitments.

Downing Street was asked on Friday whether Ms Reeves’ warnings of coming difficult decisions despite the OBR’s improved forecasting meant she had misled the public and the markets in the run-up to the Budget.

“I don’t accept that,” the Prime Minister’s official spokesman said.

He added: “As she set out in the speech that she gave here (Downing Street), she talked about the challenges the country was facing and she set out her decisions incredibly clearly at the Budget.”

On November 4, Ms Reeves set the scene for the Budget with a Downing Street speech that suggested tax rises were needed to secure the UK’s economic future and that poor productivity growth would have “consequences for the public finances” in terms of lower tax revenue.

But a letter from the OBR to the Treasury Select Committee of MPs published on Friday appeared to suggest an improved tax take from growing wages and inflation meant that gap had diminished before she even made the speech.

Dame Meg Hillier, Labour chairwoman of the committee, asked OBR chief Richard Hughes to set out a timeline for its pre-Budget forecast process, which informed the Chancellor’s decision-making.

The OBR’s first fiscal forecast ahead of the Budget, received by Treasury officials on September 17, suggested that black hole was £2.5 billion.

The watchdog’s final forecast on October 31 then suggested that it had been eliminated altogether and that there was now a £4.2 billion net positive above the Chancellor’s day-to-day spending plans.

The prospect of a hike in income tax rates – which was trailed for several weeks – were dropped on November 13, with the Treasury citing improved forecasting.

However, the OBR suggested it had provided ministers with no new forecasting in November.

“No changes were made to our pre-measures forecast after October 31,” the watchdog’s letter to the Treasury Select Committee said.

Ben Zaranko, an economist for the Institute for Fiscal Studies think tank, questioned the rationale behind the briefings in the run-up to the Budget.

He wrote on social media: “At no point in the process did the OBR have the Government missing its fiscal rules by a large margin. Leaves me baffled by the months of speculation and briefing.

“Was the plan to lead everyone to expect a big income tax rise, then surprise them on the day by not doing it..?”

At the Budget on Wednesday, Ms Reeves hiked taxes by £26 billion, including by freezing thresholds on income tax.

The tax hikes come in response to downgraded economic forecasts but also increased welfare spending because of the abolition of the two-child benefit cap and the Labour revolt over attempts to curb the benefits bill.

Ms Reeves also used some of the tax take to build herself a bigger buffer against her borrowing rules.

Commenting on social media, Tory leader Mrs Badenoch said: “Yet more evidence, as if we needed it, that the Chancellor must be sacked. For months Reeves has lied to the public to justify record tax hikes to pay for more welfare.

“Her Budget wasn’t about stability. It was about politics: bribing Labour MPs to save her own skin. Shameful.”