Haskel’s challenge

On Tuesday, Rachel Reeves nominated Professor Jonathan Haskel to be the next chair of the Office of Budget Responsibility. In doing so, she has made him one of the pivotal figures who will determine the parameters within which our likely next Prime Minister — who has pledged to maintain Reeves’s fiscal rules — will succeed or fail. 

Professor Haskel, who currently teaches at Imperial College Business School, is an excellent choice for the role given his wide-ranging experience working on macroeconomic issues over many years, including helping to set monetary policy at the Bank of England between 2018 and 2024. As someone who has been involved in the “dark art” of economic forecasting myself — albeit within Australia’s Central Bank and Treasury Department — I can attest to the fact that grappling with noisy data, unexpected shocks and Rumsfeldian “unknown unknowns” gives an appreciation of economics not found in textbooks.  

Professor Haskel will face an unusually large amount of uncertainty around the UK’s current economic and fiscal outlook. The latest OBR forecasts, which were delivered in early March, were devised just before global oil prices almost doubled after the Iran conflict escalated. The fallout for the UK economy over recent months hasn’t been pretty.

Surveys of domestic business and consumer sentiment have fallen to multi-year lows. Market expectations for ongoing rate cuts from the Bank of England have evaporated — pushing up borrowing costs and dampening activity in the housing market — while the number of job vacancies has fallen to the lowest level since the pandemic-related lockdown restrictions were lifted in 2021. Encouragingly, last week’s deal between the United States and Iran has seen oil prices normalise to pre-war levels, but bond yields remain well above their pre-war levels and there is still much uncertainty about how much damage has been done to the UK economy. 

There is a material risk that the OBR will be downgrading its economic and fiscal forecasts for the UK in November. If it does, Professor Haskel will be slashing the amount of “fiscal headroom” that Burnham and his pick for Chancellor will have against the Government’s existing fiscal targets. 

The key question is: what will be their response? The OBR’s independence means they will not be able to call up Professor Haskel and ask him to fiddle the numbers. One option is to follow last year’s playbook and raise taxes. Another option is to cut spending — perhaps by using Burnham’s greater political capital to reopen the question of welfare savings. They could also just allow the amount of headroom to decline or change the fiscal rules altogether — though the latter could provoke an undesired response from the bond market.  

 There’s likely to be lively debate around all these options over the coming months as potential advisers and ministers under Burnham pitch their preferred set of policies. Reports suggest that Burnham himself may be open to changing course on a range of fronts, including tax on capital gains and housing — such as swapping stamp duty for a land tax — as well as reconsidering the ban on new drilling in the North Sea . These could have major implications for the OBR’s economic and fiscal projections.

As Policy Exchange’s Prosperity Programme has set out, the best course for Britain would be to prioritise a policy mix that supports a recovery in economic sentiment and the labour market in the near term, while setting the scene for a stronger and more productive economy in the long run. This could involve cutting taxes on employment and small businesses, coupled with a long-run strategy that funds higher investment in defence and infrastructure by reforming spending on social spending (including pensions) and allowing more drilling in the North Sea. 

On the latter point, our own Policy Exchange analysis, based on the size of untapped reserves in the North Sea, suggests a more permissive approach to licensing could unlock around £250 billion in oil and gas revenues over the next few decades — compared to current policy settings — and add around £80 billion to £160 billion to government revenues depending on the tax regime. Importantly, this extra production needn’t conflict with the Government’s broader net-zero emissions goals, given domestic oil production would simply displace imports from abroad, and the higher tax revenues could help fund a range of ambitious long-term investments in infrastructure and defence.

Professor Haskel’s economic forecasts will shape the Government’s next Budget in November. Unless Burnham can kickstart growth before then, the challenging fiscal outlook will prove one of his biggest early challenges — and one that without careful navigation could see him undone.