The King’s Speech on 17 July 2024 confirmed that one of the new Labour Government’s priorities would be legislating to ensure that all significant tax and spending changes are subject to an independent assessment by the Office for Budget Responsibility (OBR). On 18 July 2024 the legislation to achieve this, the Budget Responsibility Bill (the Bill), was introduced to the House of Commons and given its first reading.
Labour originally proposed introducing a fiscal lock following the Truss Government’s ‘Growth Plan’ in 2022, which announced £46 billion worth of tax cuts. A briefing document accompanying the Bill states that the negative financial market reaction to the Growth Plan was in part due to the fact that the OBR was not asked to produce a forecast or scrutinise the measures.
The Bill therefore introduces a new ‘fiscal lock’, which gives the OBR the power to produce a full fiscal forecast or assessment of ‘fiscally significant measures’, which are any single announcements, or a series of announcements over the course of a single financial year, which make permanent tax or spending commitments worth more than 1 percent of the UK’s Gross Domestic Product (currently approximately £30 billion).
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Tim Sarson Partner, UK Head of Tax Policy KPMG in the UKThe Bill says that supplementary details about the fiscal lock can be included in the Charter for Budget Responsibility, which sets out the OBR’s role and how it carries out its duties. To support parliamentary scrutiny, draft charter text has also been released providing more details of how the fiscal lock will operate in practice.
Under the fiscal lock, where the Government announces to Parliament a measure (or measures) that has not been included in an OBR economic and fiscal forecast, the OBR has the power to decide to produce a full fiscal forecast or assessment, at its own discretion, if it judges the lock has been triggered. In the event of a breach, the OBR would alert the Treasury Committee and notify it of the intention to publish an assessment or updated forecast.
Emergency, temporary measures lasting fewer than two years – such as the response to the Covid-19 pandemic – will not be subject to the fiscal lock. However, HM Treasury (HMT) would be required to make it clear alongside any such announcement why it considers the situation to be an emergency, and the OBR will have the discretion to trigger the fiscal lock and prepare a report if it reasonably disagrees with HMT’s explanation.
In a letter to the Head of the OBR, Richard Hughes, the Chancellor Rachel Reeves confirmed that the fiscal lock in no way changes the usual publication of OBR analysis and is not intended to increase the number of forecasts in a financial year.
The second reading of the Bill took place on Tuesday 30 July 2024, and it will go to a Committee of the Whole House on 4 September 2024.
Although the Bill appears to be being fast-tracked through the Commons, the speed at which it will be finalised may make little practical difference. Given Labour has introduced this legislation, and Reeves said that the Government values “the OBR’s vital role in providing independent, credible and high-quality analysis”, it would be surprising if the OBR finds itself in a position where it needs to activate the fiscal lock during the course of this Parliament.
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