“We expected the Budget to be a surprise to the markets,” Richard Hughes, chair of the Office for Budget Responsibility, has said.
Hughes appeared before the Treasury committee this week (November 5) to provide evidence on the Budget.
A member of the committee mentioned how he was worried that gilt yields had gone up by 10 basis points following the Budget and that there was £22bn of extra borrowing as a result of inflation linked gilts in government debt.
“Given that extra spending is only £30bn that seems highly material to me in terms of the overall risk profile of the UK fiscal position,” the member added.
Hughes replied: “We expected the Budget to be a surprise to the markets, just in terms of the volume of gilt issuance. So to a large extent the gilt market response was just a response to higher volumes.
“So if there are more gilts on the market, that drives down the price, and I think to some extent, the front loading of the expenditure was also a surprise to the markets. And so just the volume that the market was being asked to take down this year and next was more than they expected. We had expected the gilt market to be a bit surprised.”
Tax rises
Hughes was asked by chair of the committee, Harriet Baldwin, whether it was responsible for the Budget to create a £350bn increase in public spending given the economic and fiscal backdrop was broadly unchanged since March.
He discussed how it was a “loosening of fiscal policy” and said there were three ways to look at it.
“You can look at what's happening on spending, you can look at what's happening on tax, and you can look at what's happening to borrowing and debt overall,” he explained.
Hughes said the OBR thought half of the tax rises announced by Reeves were “relatively certain and reliable”.
“National insurance is a very reliable tax. It's a tax on payrolls. You raise it and you will bring in the revenues. But the other half of the tax yield is based on raising taxes on a relatively small number of individuals, for which the revenues are quite uncertain, because it depends on how they respond.
“So on the tax side, there are some risks around the yield that you might get from the receipts. On the spending side, there is a big increase in public spending, 2 per cent of GDP, about £70bn. It is very front loaded in its profile. So there are lots of extra resources being provided to government departments this year and next,” he added.
Savings rates
Hughes was joined by Tom Josephs and Professor David Miles, both members of the Budget Responsibility Committee at the OBR.
The panel were asked about what they thought was likely to happen with savings levels.
Miles said the OBR’s “best guess” was that savings rates would drop a little from its levels but would not get as low as it did pre-Covid.
