00:00It was a hugely unfortunate incident and we're, as you say, launching an investigation. It's going to be led by Baroness Sarah Hogg. She's going to be helped by Professor Kieran Martin, who was the chief executive, who's the former chief executive of the National Cyber Security Centre.
00:20They're going to report to the Treasury Select Committee and to the Chancellor. I think that will happen quickly within a few days, hopefully by sometime early next week.
00:32This is a very serious incident and the OBR is determined to get to the bottom, find out what happened, make sure it never happens again.
00:39OK, yeah, we spoke to Dame Meg Hilliard yesterday, the chair of that Select Committee that you mentioned. Does it mean reforms for the OBR? Would you go as far as that?
00:48Obviously, the report has not come yet, but is that your instinct or is this a one-off?
00:53Well, I think we have to wait to see the results of the investigation. And as I say, Kieran Martin is an expert on cybersecurity.
01:03I think they will absolutely uncover what happened and we wait to see the results of that.
01:08In terms of the actual budget, are we right in saying that these are two of the biggest tax-raising budgets on record?
01:18There's a graph on the Bloomberg Terminal if you want to compare it.
01:21I mean, the previous such large tax-raising budgets, most of them go back to the 70s.
01:26So it's decades since we've seen this kind of tax-raising budget and yet they do nothing, very little for growth and the OBR's downgraded economic growth for the UK.
01:36Is that your scoring?
01:39It's certainly a substantial rise in taxes.
01:41They're kind of back-loaded in the sense that they tend to come through in 2028, 2029, but the policy measures raise something like £26 billion in extra revenue.
01:54As I say, mostly four years down the road.
01:57That is a substantial number.
01:59And there's also quite a substantial increase in spending, but the tax rises are enough in excess of the spending increases to generate, on our central forecast at the OBR, more headroom for the government.
02:14It was about £10 billion, a buffer to keep on the right side of the target that the current budget be in balance four years down the road.
02:24That £10 billion has become £20 billion.
02:27But it certainly is a substantial rise in taxes, there's no question about that.
02:32The growth forecast has been downgraded a little, not related to the government measures announced yesterday, but rather just a reassessment by the Office of Budget Responsibility of what is the realistic central estimate of the likely trend productivity growth rate for the UK economy.
02:56Based on what's happened over many years, looking backwards and in a sense, a rather disappointing failure after the big shocks of COVID and the energy price rise to see a bounce back in productivity growth.
03:11And so that downgrade is really the main factor behind, relatively by historical standards, muted rates of growth of output of about 1.5% a year.
03:22OK. Paul Johnson, economist, former director of the IFS, was on the programme just a few minutes ago.
03:28He says that there was no sense of reform or direction.
03:32He says it was a bits and pieces budget.
03:34He says that's the most worrying thing, that actually there was no direction or reform in the budget.
03:40And you could see that from the briefing and the uncertainty going into it.
03:46Is that a concern?
03:49Well, I'll leave others to sort of comment on the briefing and the sort of lead up to the budget.
03:55What's happened is instead of perhaps focusing on one particular tax and trying to create the extra headroom against the government's targets by a single big measure,
04:12there's a series of measures of a pretty diverse sort.
04:18The single biggest one, though, is effectively an increase, a further increase in income tax from freezing the threshold of the rates at which people begin to pay tax and then pay at higher rates.
04:32That's a continuation of a policy that goes back to 2022 and it raises a substantial amount of money, probably more than any other single measure.
04:41But there are a series of other measures as well.
04:44But there is concern about the backloading of those tax increases, that the spending happens earlier than the tax increases.
04:54Are you concerned about the budget unravelling in some sense, that actually when it comes to trying to implement these tax increases,
05:02that it's not going to bring in as much as your estimates?
05:06Well, I think our estimates of how much revenue come in from the various measures is a central estimate.
05:12Now, there are risks and some of them are quite uncertain measures.
05:15They haven't been tried before.
05:17So, for example, the mileage levy on electronic vehicles, it's hard to look back at previous examples to form a basis as to predicting how much revenue that comes in.
05:28But I think for each of the tax measures, what we try and do with the OBR is form a realistic central expectation.
05:35Of course, there's uncertainty, but it's symmetric uncertainty, which could mean that the revenues are bigger than we think.
05:45They could mean that they're smaller than we think, but we think they are sort of central estimates.
05:50And of course, that's one reason, that uncertainty, plus the uncertainty of shocks that hit the UK economy,
05:56why there is a margin against hitting the target some years down the road.
06:02And that's bigger, as I say, that's rather substantially bigger than it was back in March.
06:06OK. The chance that appears to have scrapped, you know, you mentioned the income tax rise because you gave her, the OBR gave her a much improved outlook.
06:17How did the forecast change? How much did the kind of pre-measures in terms of the headroom change?
06:27Well, the pre-measures estimate, that is, you know, how much is the balance between government spending and tax revenues before the government has implemented any new policies?
06:38And that number was for just being on the right side of the target, but by a wafer-thin amount of about four billion pounds,
06:49which is very small in the context of an economy that's three trillion billion large.
06:55So that forecast was not that there would be an obvious miss on the government target,
07:04but that most of the headroom had essentially gone.
07:08And that's that was there back in toward the end of October.
07:16Of course, that meant that in order to rebuild headroom, there had to be a sort of net tightening in policy.
07:27Obviously, there are many ways that the government could choose to fill the gap, if you will.
07:35So, sorry, are you saying that there wasn't an improved forecast offered?
07:39Well, the forecast, the pre-measures estimate, which is, you know, what the government would look at and say,
07:47well, how much have we got to play with?
07:49What do we need to do if they decide and try and build up headroom?
07:51Well, that was just about the right side of hitting the target, but by a wafer-thin margin.
08:00It was clear that the government wanted to build headroom in excess of what had been there before.
08:06And they had many ways of doing that.
08:08And they've gone with the package that we saw released yesterday.
08:11And in terms of the dates that were taken for the market rate path, they were agreed at the start of the process, right?
08:22So the chance are new in advance.
08:24Is that standard practice?
08:27Yes, because we need to set a basis for the forecast, which we then can put together,
08:35based on a particular explicit assumption about the path of interest rates.
08:39Now, we use market expectations of interest rates.
08:43We look at gilt yields.
08:44We look at expectations of where the Bank of England policy rate will go.
08:49And we need to set that and then make forecasts about what the implications of that are
08:55and all the other things that affect the UK economy.
08:58So you have to pick a particular window.
09:00It's obviously helpful in producing the most up-to-date forecast that you use a recent window.
09:09And one can use a slightly more recent window for the purely fiscal implications of what debt interest payments might be
09:17than you can use to set the interest rate background for the more general economy forecast.
09:25And that's why we use a slightly later window for gilt yields and expectations of bank rates,
09:33set all that out right at the beginning of the process.
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