Reforming the OBR will take courage, but it would well be worth it, writes Michael Martins in today’s Notebook
The case for reforming the OBR
Ahead of next week’s Budget, I am something of a rarity: a small business owner who is cautiously optimistic. Not because I expect pro-business policy, but because John Healey has a rare opportunity to lean into a pro-growth cause with union support: reforming the Office for Budget Responsibility (OBR).
The OBR, which quantifies the government’s headroom and therefore its room to tax and spend, has achieved something remarkable. It has united Liz Truss, who wants to see the back of it, with the Trades Union Congress, which wants a root-and-branch review. Last month the Treasury Committee rejected reform and defended the OBR’s independence.
On independence, the Committee is right, but on reform, it is wrong. There comes a point in a democracy when voters’ disillusionment with fiscal policy must be answered. I believe we are at that point.
The problem is that the OBR treats our behaviour as if it were linear. When it costs a policy, it assumes people and firms respond in a single, proportionate way i.e., raise a tax and receipts rise by a fixed amount, cut one and receipts go down. In reality, and as we all know, responses compound and interact. Businesses relocate, investment is deferred and workers are hired or let go, and each of those knocks on to the next. A model that captures only first-order effects will always misprice growth, while also omitting shocks like a closed Strait of Hormuz.
There is a precedent for courage. In 2023, the Bank of England commissioned former US Federal Reserve chair Ben Bernanke to review its forecasting, and then subsequently accepted all twelve of his recommendations. Its independence remained intact and its credibility improved.
The OBR deserves the same treatment. Healey has committed to the fiscal rules he inherited, but improving the forecasts against which they are judged carries no such taboo. Now is the moment to be brave.
The Prime Minister can do better than capping bus fares at £2 and his Chancellor should make the case for change.
Parliament is finally taking an interest in business
Since the last election, most of the pro-growth ideas coming out of the government have looked designed to stymie growth, whether that be through higher rates of tax on business, tighter regulations or making it harder to hire someone. It is therefore a welcome sign that the Business Committee has announced an inquiry into what Parliament can do to support the UK’s world-leading entrepreneurs. Whilst some may say it’s a bit like closing the stable door after the horse has bolted, it’s a step in the right direction.
Is Anthropic really a ‘startup’?
Ahead of its IPO, several prominent politicians and journalists have recently been calling Anthropic a startup, even though its expected valuation could end up being larger than the UK’s entire economy. Whilst I appreciate that Anthropic may be a relatively new company, as any small business owner will know, having to run your own payroll is probably a more accurate marker for whether you’re a startup, rather than having the world’s most valuable IPO.
If we can afford two No. 10s, what else can we afford?
The PM recently hosted the CEOs of some of the world’s biggest international companies to soften the ground for the tax rises coming in next week’s Budget. Whilst I can appreciate the vibe shift of a No 10 engaging more with the business community, if we can afford shuttling staff between London and No 10 North for photo-ops, perhaps the PM can afford to host a monthly feedback reception for the UK’s entrepreneurial community. Who knows, amassing a crowd like that may even prompt some interesting pro-growth ideas to make things just a little bit easier.
Frieze’s underdog rival
As the global art world descended on Regent’s Park for Frieze, I seized the opportunity to wander a bit down the road for the Fair Play Art Fair (FPAF), which took the bold move to hold their private viewing on the first day of Frieze’s general opening.
Whilst Frieze will always steal headlines as it regularly sells work for tens of thousands to a sea of the great and the good, the FPAF was slightly more modest in its approach, with pieces ranging from £250 to £5,000. Although it was a full house on the night, which made it more difficult to take in the art in the way I would normally like to, my favourite artists on the night were Marcus Aitken, Edyta and Curtis Holder, who I like to think stole the show.
Michael Martins is a partner at Overton Advisory and formerly a staffer at the US embassy