Treasury Committee

Oral evidence: Spring Statement 2025, HC 813

Tuesday 1 April 2025

Ordered by the House of Commons to be published on 1 April 2025.

Watch the meeting

Members present: Dame Meg Hillier (Chair); Dame Harriett Baldwin; Rachel
Blake; Chris Coghlan; Bobby Dean; John Glen; John Grady; Dame Siobhain
McDonagh; Lola McEvoy; Dr Jeevun Sandher; Yuan Yang.

Questions 1 - 102

Witnesses
I: Richard Hughes, Chair, Office for Budget Responsibility; Professor David Miles,
Member, Budget Responsibility Committee; and Tom Josephs, Member, Budget
Responsibility Committee.

Examination of Witnesses
Witnesses: Richard Hughes, Professor David Miles and Tom Josephs.

Q1 Chair: Welcome to the Treasury Committee on Tuesday 1 April 2025.

Today, we are starting our investigation into—or examination of—the
spring statement made by the Chancellor to the House of Commons last
week. This morning, we are delighted to have representatives from the
Office for Budget Responsibility in front of us. I am delighted to welcome
Richard Hughes, the chair of the Office for Budget Responsibility, who is
joined by Professor David Miles and Tom Josephs, both members of the
Budget Responsibility Committee. We are keen to hear from the OBR,
which of course produced its forecasts last week, which is why the spring
statement took place. For those who may be following, the OBR is required
to produce two forecasts a year; one is always around the Budget, and the
other is at a moment of its choice.
Before we go into the spring statement, though, I have noticed that you
are approaching the end of your first five-year term, Mr Hughes; you were
appointed for five years, which runs out in six months from this week, on
3 October. Are you planning to seek a second term as chair of the OBR?
Richard Hughes: I wrote to the Chancellor earlier this year to the effect
that I would be interested in serving a second and final term, so yes.

Chair: And have you had anything back?

Richard Hughes: Not as yet, but I appreciate that the Chancellor has a
lot on her plate at the moment.
Q2 Chair: She has had a busy week, indeed. We were actually up at the
Darlington campus with the Treasury when we saw a report from
Bloomberg listing in detail the elements of the OBR’s forecast. It felt that—
well, that was a leak, and there has been a leak inquiry by the Treasury.
Did you see that as a leak? Was it a leak of your forecast in detail?
Richard Hughes: I read the Bloomberg story at the time. I do not know
whether it was a leak of our forecast or whether it was just well-informed
speculation. Certainly at the time gilt yields were very high, and we are
transparent about the mechanics of our forecasts, so it would not have
taken much for a well-informed journalist to have come to the conclusion
that much of the headroom was already spoken for by the rise in gilt
yields and interest rates.

None the less, I should say that the OBR takes the security of its forecasts
very seriously. It is very important for us that our preliminary forecasts
are received only by the Government. It is also very important to us that
our final forecasts are first received by Parliament, as a Command Paper.
The OBR has never leaked in its 15-year history, and when this particular
incident happened, I made proportionate inquiries and satisfied myself
that the OBR was not the source of the information.

Q3 Chair: Then, on the morning of the spring statement last week, there
was information that, from the outside, looked to have come from your
forecast. Do you believe that was a leak of your forecast?
Richard Hughes: Again, I do not know. I am satisfied that it was not the
OBR that was the source of the story.

Q4 Chair: Have you had any conversations with the Treasury about this
matter?
Richard Hughes: I have, and I know that the Treasury has initiated its
own leak inquiry, which I think is ongoing, so we will find out the
conclusions of that.

Chair: Thank you for that. Certainly, it was a serious matter. I should also
say, for the record, that it did also appear in the Financial Times. In my
experience, both publications would be keen to ensure that they had a
solid and independent source, which seems to suggest that it came from
someone quite familiar with what was going on. But that is speculation on
my part.

Q5 Bobby Dean: Mr Hughes, you are probably aware of some criticism of the
OBR’s role in our national policy debate at the moment. That is not
necessarily about the work you do or your independence, but the reliance
on your forecasts above all others in determining the Government’s fiscal
policy. I would like to hear your response to that, and whether you think
we would benefit from having a plurality of forecasts in these moments
when the Government are making key decisions.
Richard Hughes: The OBR’s role in the Budget process has been the
same for the last 15 years. Our powers were given to us by Parliament in
legislation. Those powers are to produce a forecast to scrutinise the cost of
 Government policies, to reflect those in our forecasts, and to assess the
Government’s performance against their fiscal rules. It is for Chancellors
to set the rules that they set for themselves; it is for Chancellors to decide
what policies they want to pursue relative to those rules, how much
headroom they want to set aside against those rules, and whether they
want to change those rules. Those are all decisions made by Chancellors.

One thing that has attracted more attention to our forecast in recent years
has been the fact that in recent years Chancellors have left themselves
very little headroom against their fiscal rules, which has meant that small
changes in our forecast can make the difference between meeting or
missing those fiscal rules and require Chancellors to make policy
responses, as you saw in this event.

The result is that Government policy tends to be quite responsive to what

are, in the grand scheme of things, very small changes in the fiscal
outlook. There is £1.5 trillion-worth of Government spending and revenue
out there, and the change in our forecast this time around was just £14
billion—1% of the total sum of tax and spending that the Government do
in a given year. With that kind of slim margin, if you have so little set
aside, it is inevitable that small forecast changes, may warrant a policy
reaction.

Q6 Bobby Dean: We will come back to fiscal headroom later on, but you
mentioned that the OBR’s role has been the same over the past 10 or 15
years. Can you describe to us how your relationship with the Treasury has
changed? Has it changed from Government to Government? Has it
changed over time? It would be interesting to get an insight into that.
Richard Hughes: It has been fairly similar, I would say, throughout those
15 years. We have always provided baseline forecasts to the Treasury and
been engaged in scrutinising its costings. One thing that has evolved in
recent years, partly as a result of representations from this Committee
and partly as a result of representations from the Government, has been
more transparency about what is known as the indirect effects of
Government policy, or the feedback effect of Government policy—not just
the direct effect on the public finances, but how it might affect the macro-
economy.

In recent years we have aimed—supported, I should say, by some good

work by the ONS, which nowadays provides much better contemporaneous
data on the drivers of potential output in the UK—to be more transparent
in the way we think about so-called supply-side effects from given policies.
That has changed the nature of the interaction between ourselves and the
Treasury a bit, but generally speaking it has been quite similar across
Chancellors and over recent years.

Q7 Bobby Dean: When you say you scrutinise the costings, it is unclear to
me how a decision is made about when the OBR is to score a policy. I will
give an example so that we can get to the point more quickly. Obviously,
we did not score the planning reforms last time, but we have this time. I
think the intention of the planning reforms was known previously and the
 legislation has only just entered the House, so I am not quite sure what
the distinction is if you compare that with the Employment Rights Bill,
which is much further along its legislative journey and has not been fully
scored yet. Could you explain why that is, using those two examples?
Richard Hughes: Tom is in charge of many of the costings we do on the
fiscal side but, as a general principle, before we can score a policy we
need to see the detail of it. We are trying to understand in concrete terms
how much the policy will cost and how it might interact with the economy,
and that requires the Government to specify in quite a bit of detail what
the policy is.

In the case of planning reform, that had been evolving over the course of
last year. There was a consultation and then the details were finalised in
December, when the revised national planning policy framework came out.
That gave us sufficient clarity about how the planning reforms were going
to operate to score them. Importantly, it also enabled us to talk to outside
stakeholders and experts, because we are not housing market experts—
well, David is quite a good housing market expert, but it is important to us
to be able to talk to house builders and academics who look at the housing
market. There is a big advantage in having the policy clearly specified so
that you can talk to them about it, rather than its being something
confidential to Government. Where detail is provided to us confidentially,
we try to look at it and assess it; in the case of this particular forecast,
there were parts of the welfare reform package that we were able to score
and other parts that were not sufficiently well specified for us to score in
our forecast, in particular around employment support.

With the employment rights legislation, a lot of details are yet to be

specified; I think more than 100 amendments have been presented in
Parliament, which we understand the Government are in the process of
going through and considering. We took the judgment at this stage that
that Bill was too fluid and the details were too up in the air for us to reflect
in our forecast, but we will do that when we have a clearer idea of the
specific measures being taken on the Employment Rights Bill.

Q8 Bobby Dean: On a final point of clarification, you said that you take the
view, so is it your decision when to score a policy? There is no veto power
from the Government to say, “No, hold this one back—we want that to be
scored next time, not this time.” They do not have the power. It is up to
you when you are ready to score it.
Richard Hughes: We decide when a policy is of sufficient clarity for us to
score it. All the Government could do would be to keep things vague—we
have sometimes observed this as a strategy in the past—to get around
these things. But no, it is for us to decide when a policy gets called.

Q9 John Glen: Could I ask a follow-up on that specific point? Under the
previous Government, childcare policy was quite significant and there was
quite an intense iterative process between the Treasury and the OBR with
respect to scoring it. It would be fair to say that the Treasury would, in
some circumstances, be keen to push you on that. Can you describe the
 nature of that conversation and whether there is room for iteration in the
preparation of your forecast?
Richard Hughes: It depends on the timetable we are following. We do
three pre-measures rounds to the forecast—that is, without any policy
measures—and then we have two post-measures rounds. On occasion,
when we have been in a hurry for one reason or another, be it energy
crises, pandemics or whatever, we only manage to do one pre-measures
round.

When there are two pre-measures rounds, the Treasury gets a first look at
what the post-measures position looks like, including our judgments about
the direct costs of a measure, and any indirect effects we think might have
an impact on the macro economy. That gives them an opportunity to
revisit some of those policies and change them, and sometimes they do—
because they do not like the look of the fiscal bottom line or they do not
like the look of the economic effects, be it on employment, investment or
other areas. So they do sometimes revise the policy in the light of what
they see as our judgment.

Q10 John Glen: The key concern is that the Government are elected to decide,
and you have a lot of influence over that. There is contestability over what
level of maturity policies are at. Obviously, all Governments would say,
“This is going to deliver x,” and you could say, “Well, no, it is going to
deliver y.” I think people are very interested to understand how that
conversation works out. To the original question, you are the arbiter of the
value of different Government policies, and that is material to the
Government’s standing.
Richard Hughes: We are the arbiter of how they score in our forecast
and in terms of what policies might cost or yield and what effect they
might have on the economy. Governments are entitled to pursue whatever
policies they like; we just have to make sure that there is a central and
credible estimate that we can explain to the public when it comes time to
put it into our forecast.

After our forecasts are completed, we always try—sometimes alongside

them in the EFO, and sometimes in supplementary releases—to be as
transparent as we possibly can about how we have arrived at any
judgments. We frequently publish articles, including on the childcare
policy, about how we arrived at particular costings or treatments in our
economic forecasts. We aim to explain our reasoning. When we get
feedback from the rest of the world to say that they think we got it wrong,
we listen to that and sometimes revise our judgments in future recostings
of the measures or in views that we take on other measures.

John Glen: Thank you very much, Mr Hughes.

Q11 Dr Sandher: Professor Miles, I want to ask about crowding out. How do
you calculate the level of crowding out in relation to public investment?
Professor Miles: It depends a bit on what the state of the economy is. If
there is a lot of slack in the economy, unemployment is very high and
 there are firms who are keen to do business but just cannot get work, the
level of crowding out would be pretty small. That is not a good description
of where the UK economy is right now, because measured unemployment,
at least, is at a pretty low level. There is a big issue about whether
measured unemployment, at about 4%, really is a good guide as to how
much slack there is in the labour market. However, whichever way you
look at it, the idea that there is a lot of slack in the UK economy at the
moment does not quite stack up with the evidence.

In a situation like that, if there is a big increase in demand for one

element of production in the UK, it probably squeezes out some activity
somewhere else to a significant extent. That could be consumer spending,
net exports or other elements of investment; it depends a bit on the
nature of the public investment. To give you an example, we think there is
going to be a substantial increase not in public spending, but in building
houses, and there is a question about the supply capacity of the
construction sector. We judge that there will be a little crowding out, on
the back of more house building, of other types of construction activity—
extensions to people’s houses, renovation of the existing stock, and so on.
That is just one example of how it depends on the kind of public
investment. It is not a great example because it is actually not public
investment, but it is extra house building as a result of a Government
policy measure. The big issue really is how much slack and spare capacity
there is in the UK economy.

Q12 Dr Sandher: You say that things have not really changed that much since
October. It seems that in your last judgment we were pretty close to
capacity, but in your latest forecast they have changed. Take the example
of quarter 3 in 2025. In October, you were saying that the economy would
be above capacity and now you are saying that it will be below capacity:
that is quite a big difference in terms of slack. Employment levels have not
really changed and GDP has not changed a huge amount. How have we
gone from above capacity to below capacity in the last six months?
Professor Miles: It is partly on the back of what you might call hardish
data about what has happened to GDP growth, which was very weak in
the second half of last year. Business and consumer sentiment took a
pretty substantial hit at the back end of last year, and that carried on in
the first couple of months of this year. Interest rates are a bit higher—not
so much the short-term Bank of England interest rates, but longer-term
interest rates have had a substantial increase in gilt yields. That has been
not just in the UK, but in quite a lot of countries.

All those things make the likely level of economic activity for 2025 a good
bit weaker than we thought back in October—what happened at the back
end of last year and the first couple of months of this year. We think it is
enough to go from output being slightly above the capacity of the UK
economy to being somewhat beneath it. As you say, there has been a big
turnaround. We thought that growth might turn out to be 2% in 2025; our
best guess now is 1%. That is a pretty big change.

Q13 Dr Sandher: I want to talk about the impact that that ends up having on
 the wider forecasts—the “crowding out” side of it. In October 2024, you
said in your EFO: “with the economy operating close to its potential level,
with an output gap of -0.2 per cent this year…the significant and sustained
fiscal expansion of around 1 per cent of GDP per year crowds out some
private sector economic activity.”
Now you assess that there actually is spare capacity in the economy at
that time; I think last time we discussed how public investment was to
increase—maybe it could increase the supply side and maybe run at
capacity at the time. That would suggest that the Government’s increase
in investment would not be subject to crowding out in the same way that
you forecast in October 2024. How does the change in crowding out affect
your forecast of the impact of public investment on the level of output in
the next five years?
Professor Miles: It means that once we get through this year—as you
rightly say, there will be a bit more spare capacity than we thought there
would be back in October—you get slightly stronger growth in the back
end of the forecast, in 2027-28 and into 2029, precisely because there is a
bit more spare capacity in the economy by the end of this year. It shows
up in our forecast as a bit of a bounce back in the growth of GDP, starting
next year and rolling through to the end of the forecast, which would not
have been as strong had more slack in the economy not been generated
during the course of this year. That is how it shows up in the forecast.

Q14 Dr Sandher: Can I clarify that? You are saying that the public investment
scored at the last EFO, which you guys had crowding out towards the end
of the forecast period—there is now less crowding out or no crowding out?
Professor Miles: There is just more room generally for a combination of
consumer spending, private sector investment and net exports because
there was quite a slowdown at the back end of last year, which rolled
through much of this year. You can just get stronger overall demand
sustained from higher domestic production as you catch up on that level of
slack.

Q15 Dr Sandher: Specifically on the crowding out, has the estimate of the
crowding out assumption when it comes to public investment changed?
Professor Miles: The slack that we estimate exists a bit now but was not
there before allows a balanced increase in all elements of demand to be
met from domestic production. It is not all concentrated as if all the extra
using up of spare capacity were all going to be investment. We spread it
across all the components of demand: consumption, investment and net
exports. But as an implication, there is a bit less crowding out because
there is a bit more slack in the economy.

Q16 Dr Sandher: You also talk about how planning reforms specifically will
increase the level of trend productivity—that is, slack or capacity in the
economy later on—by 0.2%. I want to quote specifically from page 27 of
the EFO, which says, “This increase is driven by the residential planning
reforms”—that is, the increase in trend output—“which we expect to
 increase construction sector productivity and housing services due to the
higher housing stock.” If I understand that correctly, you are saying that
planning reforms increase the potential capacity of the economy because
there is more construction. If the Government had invested in October, on
your view, into social housing from the public purse, what impact would
that have had on output in years 4 and 5? That is, on your forecast, would
they have been crowded out?
Professor Miles: One of the reasons why we have a slow build-up in
extra house building as a result of the planning measures, and why it is
not faster than what we have built into the central forecast, is that there
likely are some capacity constraints in the residential construction sector
that hold back, to some extent, the ramp-up in house building. It gets a
bit bigger beyond the end of our forecast horizon after 2029.

We would probably have had an even bigger assessed impact of the

planning reforms over the next five years, were it not that there were
some pretty obvious supply constraints, certainly in the short term, in the
construction sector. If you had added a lot more extra house building for
social housing on top of what is already in our central forecast, I think it
would have had some impact, but it would still have been somewhat
constrained by the supply potential in the residential construction sector.

Q17 Dr Sandher: That is not quite the question I am asking. You said that
public investment in October would have been crowded out. You are now
saying that planning reforms that lead to more construction investment
will not be crowded out because of the increase in the supply capacity. My
question is this: why is it that, if the public sector had invested in extra
house building in October ’24, you said the investment would be crowded
out, but when planning reforms allow for more private sector investment,
it is not crowded out because it increased the supply potential of the
economy? Why does public sector investment not increase output, if
private sector investment does?
Professor Miles: What the planning reforms have done is to allow house
building on land that would almost certainly not have got planning
permission in the past. If you take some land—let’s say it is used for
agricultural purposes and it is just outside the M25—and that acre of land
has 20 sheep on it, it is producing output, but at quite a low level. If you
then build houses on it, the value of what you construct, which is then
used for many decades to come, is substantially higher. That is ultimately
the source of the productivity effect. That planning reform was not in place
in the past, but it is now clearer what it will do. That is what gives you the
productivity.

Q18 Dr Sandher: I beg your pardon, but there are more than 1 million houses
at the moment with planning permission but unbuilt. You are saying that
the planning reforms lead to a higher potential output because they lead
to more construction. If I am understanding you correctly, if I were to
build those 1 million houses, that would not increase potential output,
according to your view at the moment, but if I were to grant planning
permission somewhere else, it would.
 Professor Miles: I think the main source of the productivity boost is land
that, used for residential construction, will produce housing of high value
and generate rents—either actual rents, if it is rented out, or implicit rents,
if it is owner-occupied. Many of those houses will be around the south-east
of England, where there has clearly been a constraint on building. That
gets eased, so that is the source of the productivity. If you had not eased
that, I don’t think you would have got the productivity improvements.

Chair: That was very clear. Thank you, Professor Miles.

Q19 Lola McEvoy: We all watched your webinar, and you outlined the three
risks facing the country and the economy as productivity, interest rates
and global trade. We will just dig a bit deeper into your productivity
analysis. In chart 1.1 of the EFO we see the trend productivity level graph.
I think it is accepted that productivity has flatlined since the economic
crash in 2007-08.
I want to understand your analysis. In the EFO, you said, “In our central
forecast, we expect that the level of trend productivity will remain
permanently below our October forecast”. This Committee is really
concerned about the data feeding that analysis and about what is going on
in the country. We really want some clarity, so can you give us a bit more
detail on that, Professor Miles?
Professor Miles: One of the big things that happened between the
October forecast and the more recent forecast, last week, was that there
were some pretty big revisions to data. In particular, the Office for
National Statistics’ current estimate of the level of employment in the UK
is something like half a million higher than we thought. There was a slight
increase—but much smaller, proportionally—in their estimate of the level
of GDP in the last couple of years. The impact of that was that the
measured productivity—the output relative to how many people are
working and how many hours are worked—actually fell a lot. On the latest
data for the back end of last year, it was about 1.3% or 1.4% lower than
had seemed to be the case back in October.

Now, there is a lot of uncertainty about that—there are issues with the
labour market data at the moment—but given the increase in population
and in the scale of net immigration in the last couple of years, it was not a
great surprise that the ONS now think that there were more people
employed in the last year or so. That has an effect on your estimate of the
level of productivity into the future, assuming that you believe that those
people really are here, are working and are going to stay. That has an
impact on how you think GDP and productivity might roll out in the future.

To cut a long story short, we have taken most of that lower level of
productivity as the starting point, but said that the growth of productivity
ultimately gets back to the level of growth rates that we have seen in the
past. That puts us in the OBR at the optimistic end of assessments of
productivity, but it still gets you in the end to a level of productivity that is
about 1% or 1.3% lower than we thought before, so there is a kind of
level effect and a rate of growth effect.
 You could look at that in two different ways. You could say, “The OBR have
become much more pessimistic about the level of productivity,” but some
of the commentary in newspapers and from other economic forecasters
still describe the OBR as at the very optimistic end of productivity,
because they are looking at the rates of growth but starting from a lower
level. What we have done on productivity is a slightly mixed picture.

Unfortunately for the accuracy of our forecast, the growth of productivity

is a particularly important assumption for the level of GDP, standards of
living and the fiscal position, and it is extremely difficult to work out what
it might be in the future. It is hard enough to work out where we start
from. The reason it is difficult to forecast is not that it is rocket science; it
is just that over the medium term—over a five and 10-year horizon—what
happens to productivity is very sensitive to new technological
developments. You can’t predict what they are, because if you could, you
would already know what is coming down the road. That is one of the
reasons why, in our analysis, we are very keen to stress different potential
scenarios of productivity growth. That makes a really big difference to the
fiscal outlook.

Q20 Lola McEvoy: Obviously, you said that population growth is half a million
higher, and that brings down our productivity level, which is GDP divided
by the workforce. What are those people doing, and why have they not
been working at a level that would have brought the productivity level up?
Is the half a million all immigration? What is your analysis of who they
are?
Professor Miles: It is just that the ONS think there are half a million
more people working than they thought before. That upgrade to their
assessment of the level of employment is all about the last couple of
years, and the one thing we know about the last couple of years is that
there was an unusually high level of net immigration into the UK. The
majority of those people coming into the country would have been
working.

You can’t infer directly that the extra half a million people are all recent
immigrants. Anyway, there they are. There are people who appear now to
have been working for some time whom the ONS didn’t think were
working before. They have not increased their GDP estimate for where we
have been in the last couple of years, so just arithmetically you get a
lower level of productivity.

Q21 Lola McEvoy: Are they guessing that it is the immigration figures that
have changed? How secure are you in the data? If we have all this analysis
of what people are doing, but on the ground in our constituencies we know
that people are working really hard around the clock, I am just a bit
concerned about suddenly saying that it is about a mass swathe of
immigration that has come in and those people are not working at a
productive level. I do not really understand how you can get to that
conclusion.
 Professor Miles: I suppose the ONS would not describe it as a guess, but
in a sense it is something about which—

Chair: We might get on to the ONS in a minute.

Professor Miles: Well they might describe it as a guess, I suppose. It is

well known that it has real trouble in assessing the state of the labour
market. The labour force survey, which used to have very high rates of
response, dropped off in covid and did not come back.

Chair: We have examined that, and we are continuing to watch that.

Professor Miles: So who knows? People should have much less

confidence in the employment statistics than they used to. It is the ONS’s
best current estimate of how many people have been working in recent
years. I do not think there is an implication that a lot of people are coming
to the country and not doing very productive things. It has just happened
that, in a period after which there has been a large increase in
immigration, the ONS have found apparently half a million more people
working. They are not saying that those half a million are more recent
immigrants.

Q22 Lola McEvoy: We are saying that productivity is going to increase by the
end of the forecast, but it is permanently below the October forecast. I
just want to dig a bit deeper into why it will be permanently lower.
Professor Miles: It is because of the start point. If you take the ONS
numbers on GDP and employment, the start level is depressed. We think
that some of that may be transitory and some of it may be measurement
error, and it is difficult to know how the ONS will change its view of
employment in the future.

What we have not done is permanently reduce the growth rate of

productivity, which would have depressed the level even more going four
or five years down the road. We have kept the growth rate more or less
where it was. Some people will say that it is too optimistic, and that then
implies that you just get a shift down in the level of productivity. It is still
higher at the end than it is now by a pretty substantial margin. As I say,
some people will judge that as excessive optimism by the OBR, but if you
look at the level, it does not seem to me an optimistic assumption at all.

Q23 Lola McEvoy: Does anybody else on the panel have anything to add on
that productivity point?
Richard Hughes: I want to underpin what has been said. I know this is
an issue that the Committee has been focused on, and on which you have
written to the national statistician, but it is about trying to get a clear read
from both the labour force survey and the ONS GDP data, which has been
significantly revised, including recently. We are expecting further revisions
later this year. Matching up the GDP data with the labour force data and
then trying to extract a clear signal about the outlook for productivity is
very difficult at the moment, but it is something that we always keep
 under review. We will take another look at it in the run-up to the next
forecast, in the light of what the data says.

Q24 Lola McEvoy: Just a final question from me on that, is our current
productivity measure fit for purpose? We are making a lot of national
policies that are significantly impacting people’s lives based on this
productivity puzzle. What do you think we could do as a Committee, or as
a Government, to improve how we are measuring productivity?
Richard Hughes: A better labour force survey is most important, but
getting updates to output data that match the vintage of the labour force
data is equally important. Having output from some periods and labour
force data from others does not give you a good sense of what the trends
are. Waiting for either the numerator or the denominator to be updated,
when you are looking at either one or the other, is not a good place to be.
Quality, timeliness and consistency of the main macroeconomic datasets
are the things that are most important to us as forecasters. Ideally, what
we want to do is have a snapshot of where the economy just was before
we try to figure out where it is going over the next five years. Instead, at
the moment, we get an incomplete picture from different points in time
from what we get from the ONS at the moment.

Q25 Chris Coghlan: I fully understand the issues you are talking about in
forecasting productivity in the long run, and it seems entirely reasonable
to me, but chart 2.4 shows you are forecasting a big bounce back in 2026.
I acknowledge the issues, and my understanding is that part of that is just
bringing productivity back to its long term pre-2008 trend, but how
credible is that? Surely there are pretty big downside risks to your forecast
given that Citigroup is saying that if you are wrong by just 0.1 percentage
points, that is £7 billion to £8 billion in fiscal headroom gone.
Professor Miles: You are right. If there were no recovery in the rate of
growth of productivity from the recent apparently very low levels in 2023
and 2024 in particular, by the end of the forecast horizon instead of there
being, on our central forecast, about £10 billion of headroom against the
Government’s don’t-be-in-current-deficit rule, we would be £40 billion or
£50 billion the other way.

Chris Coghlan: So no significant bounce back.

Professor Miles: Right. That is if the growth rate of productivity, which

was dismal for the last couple of years, just does not recover from that
level. So not only do you start 1 and a bit per cent down, but relative to
October you then grow at a slower rate as well so you end up really
substantially lower on productivity. That would mean that the current
fiscal deficit would be something like £50 billion as opposed to £10 billion
the right side of zero. It is absolutely enormous.

Of course, if on the other side you said, “So the measured productivity
looked pretty bad in 2024 and there have been these new estimates from
the ONS, but let’s attach limited weight or maybe no weight to that and
assume that the level of productivity by the end of 2029 is the same as we
thought back in October,” then instead of there being £10 billion of
 headroom that goes up to £34 billion or £35 billion. There is a huge swing
on where reasonable people could be at either end of that spectrum.

Q26 Chris Coghlan: Because if I am reading chart 2.4 correctly, I think you
have about a 0.3% bounce back next year.
Professor Miles: In the growth rate.

Chris Coghlan: In total factor productivity. That seems quite brave given
that productivity fell last year.

Professor Miles: Yes, indeed. “Brave” is a word that may be appropriate.

It is partly that some of the very low measured productivity for the back
end of last year might be a reflection, coming back to something we were
talking about a little bit earlier, of an opening up of slack in the economy.
Getting rid of that slack, which happens over the course of our forecast, in
a sense gets you back that lack of the opening up of the slack in the past.
It shows up as measured productivity but it is not like some kind of
breakthrough in inventions that suddenly increases productivity; it is really
using up a bit of slack in the economy.

Q27 Chris Coghlan: To be slightly more generous to the Government, they

announced quite significant increases in both public investment and public
R&D. Have you updated your fiscal multipliers and therefore your
economic growth as a result of those announcements, and should you?
Professor Miles: Well, just coming back to the earlier question, the fact
that we now think there is a bit of slack in the economy and we did not
think that back in October means that we assume that the stance of
monetary policy means that we get back to what you might call a balanced
position of neither excess demand nor excess supply. That allows all
elements of spending—consumer spending, investment spending, net
exports—to be a bit higher than they otherwise would be. So we kind of
spread out the extra output across the main components of demand. That
is how the model works.

Q28 Yuan Yang: Professor Miles, you just said that people should have much
less confidence in the employment stats than they used to, and when you
last spoke to the Committee last November you mentioned that you were
not very confident about the labour force survey data. By contrast, when
we saw the ONS as a Committee the national statistician said to us that he
was very confident about the data on inactivity. Can you square that circle
for us?
Professor Miles: It has been difficult for the ONS because the survey,
which it has relied on for many years, has self-evidently become less
reliable because the number of people who are answering the survey has
fallen very substantially. That then raises a question about whether you
are getting a sort of sample selection bias—that there are certain sorts of
people who just say, “Look, I can’t spend 45 minutes filling in this survey.”
It is not just that you have fewer people; it may be that they become, in a
way that is difficult to predict, a biased sample. Of course, one can never
have perfect faith in any statistics—the ONS has a difficult job—but the
 level of uncertainty seems to me to be pretty clearly higher than it was in
the past, and certainly pre covid.

Q29 Yuan Yang: Does the fact that the ONS is very confident make you more
confident, or are you still not very confident in its data, as you were last
November?
Professor Miles: The ONS is trying to do something very difficult with a
tool that is not working as well as it did in the past. It is working hard on
trying to devise new types of evidence and new forms of survey. It may be
that the reliability of the statistics will get back to something more usual in
the longer run of history, but it is going to take a little while. It leaves one
in a difficult situation right now, particularly on these judgments about
how much slack there is in the economy, what the level of productivity is,
and how many people are actually working.

Q30 Yuan Yang: How long in months or years do you think it might take
before you are confident, or at least fairly confident, in that data?
Professor Miles: It is difficult for us to judge. The OBR is a user rather
than a creator of the statistics, so it is really a question for the ONS.

Q31 Yuan Yang: My Committee colleagues are quite keen to know whether
you think other countries have done a better job of recovering after the
pandemic in capturing labour force data. Are there any other countries
that we should be learning from in the UK?
Professor Miles: I am not an expert on quite how labour market
statistics are collected in a large range of countries, but I think generally
reliance on surveys is one of the main methods. It seems to be that the
fall-off in the survey response rate may be unusually large in the UK.

Q32 Yuan Yang: Mr Hughes, do you have any other responses to those
questions?
Richard Hughes: We are in regular touch with the ONS on the labour
force survey and wider macro statistics. The ONS does have a plan to
move to this thing called the transformed labour force survey, which
moves the data collection online and which it is piloting at the moment
and wants to move to in about 18 months.

Chair: We have looked into this quite a bit.

Richard Hughes: That may provide the long-term solution. In the

meantime, we tend to rely on a panoply of data to try to understand what
is going on in the economy. We also look to fiscal data to give us real-time
reads on things like inactivity. If people are showing up on inactive
benefits that gives you a sort of independent check on what the labour
force statistics are telling you. Real-time information data from HMRC tells
you what is happening to things like employment and salaries. We also try
to take a read from fiscal data. More generally, where national statistics
institutes seem to be going is to try to look at administrative data and a
wider range of data sources, rather than simply relying on surveys,
because response rates have been falling around the advanced world.
 Chair: Our sister Committee, the Public Administration and Constitutional
Affairs Committee, will be looking at this in more detail. We will be doing a
bit of collaboration on that, as it is obviously a serious matter.

Q33 Yuan Yang: I have a specific question about one part of the inactivity
data. Mr Hughes, how confident are you that there has been a rise in
inactivity linked to ill health?
Richard Hughes: Looking across what the LFS tells you and what the
benefits data tell you, there has certainly been a rise in people who are
reporting ill health as their reason for being outside the labour market and
claiming health-related benefits. Those numbers have risen very rapidly in
the last few years, especially in the wake of the pandemic. We are
confident that that is a trend that is showing up not just in the economic
data but in the fiscal numbers.

Q34 Yuan Yang: But not about the underlying ill health trend itself? You
mentioned there is a rise in claimants and self-reporting of it.
Richard Hughes: In our last fiscal risks report, we had a section on long-
term health trends. Also, when you looked at both self-reported and
clinical measures of ill health, there used to be rising healthy life
expectancy over time. Then, around 2018, something happened and
people started getting older but stopped getting healthier years of age,
and just started getting more years of age in not great health. Something
does appear to have happened to the rate of improvement in the health of
the population in recent years as our population has aged. That can start
to explain some of why people are turning up on health-related benefits.

The puzzle that remains is that the increase in that trend does not explain
the very steep rise in claims of health-related benefits. That growth has
much outpaced what you see either in self-reported ill health or in more
clinical measures.

Q35 Dame Harriett Baldwin: I will give Mr Josephs a chance to speak,

because I am very struck by the fact that you were last in front of this
Committee five months ago and since then there have been some quite
big changes in terms of the economic and fiscal outlook.
The headline number that got a lot of traction last week was that growth
has halved, but there are also things like inflation. You were expecting
inflation to be 2.6%; now you are expecting it to be 3.2%. You were
expecting unemployment to be 4.1%; now you are expecting it to be
4.5%. Borrowing over the forecast period has gone up by £47.5 billion.
Interest rates are higher. The debt interest bill has gone up by £30 billion.
You expect there to be more children living in poverty by the end of the
forecast period. Today, households are expecting a big increase in their
bills, and tomorrow we are probably going to be hit by tariffs.
Given the difference between those two forecasts, what are the biggest
things that you got wrong in that five-month period? Was it that business
confidence and consumer confidence took a bigger hit as a result of the
Budget?
 Tom Josephs: I will focus on the biggest changes in the fiscal forecast,
which is the part of the forecast that I lead on. Compared with October,
there are two big drivers of the change in the fiscal outlook. The first is
that interest rates increased quite significantly compared with October.
We had around—

Q36 Dame Harriett Baldwin: More than the rest of the world, or in line with
the rest of the world?
Tom Josephs: It is broadly the case that interest rates rose by similar
amounts in most advanced economies over that period; certainly, UK and
US interest rates both rose at similar rates over that period. More recently,
we have seen quite a significant increase in German rates, on the back of
the announcements Germany made on defence spending.

There is a broad international trend. UK rates rose a bit more than those
of other countries at certain points, but that overall increase in rates of
around 50 basis points compared with October on its own increased our
borrowing forecast by about £10 billion over the medium term. That on its
own was enough to eliminate the—

Q37 Dame Harriett Baldwin: Is that by year, or cumulatively?

Tom Josephs: It is £10 billion by the fifth year of the forecast. That on its
own was enough to eliminate the headroom that the Chancellor had
against her fiscal rule in October. That just illustrates the sensitivity now
of the public finances to debt interest costs, reflecting the very high stock
of debt that we have and exposure to interest rates. That was by far the
biggest factor that changed the fiscal forecast.

The other important factor was that tax receipts this year have come in
lower than we were expecting in October, particularly self-assessment
corporation tax receipts. Because those taxes are paid with a lag, some of
that actually relates to activity in the previous year, 2023-24, but we think
that the weakness in corporation tax in particular compared with our
expectations in October reflects the weaker economy and the squeeze on
profits being greater than we expected in October. That weakness
essentially means that the starting point for the receipts forecast is lower
and therefore reduces tax receipts across the forecast as well.

There is a bit of an offset in the medium term, because nominal earnings

have been a bit higher than we thought and therefore that increases the
forecast of pay-as-you-earn receipts over the medium term.

Q38 Dame Harriett Baldwin: Can I ask the same question of Mr Hughes: did
business and consumer confidence take a bigger hit after the October
Budget than you had put into your forecasts?
Richard Hughes: It did not behave the way we expected it to in October,
in that it fell over the second half of last year. Some of that was
contemporaneous with us putting together the forecast but came in too
late for us to recognise it. A mix of factors that contributed to it, some of
which were global, including the uncertainty about what the new Trump
Administration were going to do to things like tariffs. You have seen falls
 in business confidence across advanced economies, not just in the UK.
Over the winter there have also been rises in energy prices, and it was a
colder winter in Europe, which has a big impact on inflation and inflation
expectations. The pick-up in inflation has also put a dent in consumer
confidence and has kept the savings rate higher than we would otherwise
have expected, which affects how much consumption there is in our
forecasts. The momentum that we thought was going to carry on from
2024 into 2025 stalled over the second half of last year, which was also
consistent with what looked like softening of both business and consumer
sentiment.

Q39 Dame Harriett Baldwin: We are already hearing speculation about tax
increases in the next Budget. People can see through some of these bad
revisions of the forecast and recognise that it is going to be hard for the
Chancellor to do more on the spending side. They recognise that unless
growth actually materialises there will be difficult choices when it comes to
the Budget. Are you seeing business and consumer confidence still
continuing to react to that threat of tax rises later in the year, or can you
rule out the risk of any tax rises?
Richard Hughes: All of those are matters for the Chancellor rather than
for us. We will forecast whatever the Chancellor decides to do in the
autumn. It is certainly the case that when we put this forecast together it
was at a point where our uncertainty about the outlook was very high—
partly for domestic and partly for international reasons. Part of it comes
down to just trying to interpret what the mix of output and employment
data from the second half of last year and recent months tells us about the
future, which was very difficult because of all the issues that we have
discussed.

It is also partly because the international environment is very volatile and

uncertain. There are very volatile interest rates. We will find out tomorrow
what US tariff policy is and what that might imply for UK firms and our
ability to trade with other countries affected by US tariffs. There is an
extraordinary degree of uncertainty about both the domestic and
international outlook. On top of that, as Tom pointed out, the single
biggest moving part in this forecast was interest rates. Interest rates have
gone up and down by 100 basis points over a six-month period. There is
100% debt to GDP ratio.

Q40 Dame Harriett Baldwin: We are just more exposed to interest rates than
we were before, aren’t we?
Richard Hughes: We are. For all three of those reasons—the domestic
outlook, interest rates and trade—we emphasise the importance of looking
at not just our central forecast but all the scenarios around that as an
indicator of where we might end up by the autumn.

Q41 Bobby Dean: I am going to skip backwards slightly to the productivity

conversation, because I would like clarity on public sector output. We had
some interesting comments from Andrew Bailey when he was in front of
the Committee last month; he talked about how productivity since 2019
 can be 8% to 9% lower, and as high as 17% to 18% lower in the health
sector alone. He also reflected on how difficult it is to actually measure
that, and that Britain might be a bit of an outlier in the way that we
measure it. Obviously, that could be hugely consequential to our overall
productivity figures. Do you have any views on how reliable our public
sector productivity statistics are?
Richard Hughes: We are better at measuring. We attempt to measure
public sector productivity in a way that other countries do not, in the
sense that they just value public sector output at cost rather than at the
level of activity going on in different public services. We make an attempt
to ask how many patients were seen in a given day, month or year. In
that sense, we try to directly measure public productivity rather than infer
it by how much it costs to produce.

One of the hypotheses that we, the Bank and others are interrogating is
what explains the large, measured slowdown in productivity that we saw
in the second half of last year and whether it can be explained by changes
in the sectoral mix of output. If public sector productivity is lower than
private sector productivity, and we have seen strong employment growth
in the public sector, does that explain it? It is a hypothesis that we are all
interrogating, and I do not think that anyone can draw any firm
conclusions about it at the moment.

Clearly, improving productivity in the public sector would be important to

improving the quality of services that people receive from the health and
education sectors, and elsewhere. From the point of view of our forecasts,
when we are trying to assess the tax generating capacity of the UK
economy and how much people are paying in tax, what they are being
paid matters more than what they are delivering in terms of services.
Clearly, the quality of the services matters for other people’s ability to get
back into the workforce, and contribute to employment, tax receipts and
those sorts of things.

Q42 Bobby Dean: It is good that we are trying to measure it more accurately,
but it does make us different from others and adds to the question mark
over whether Britain has a unique productivity problem compared with
others. Is this real, or is this measurement? Do you have any sense of
that?
Richard Hughes: When we looked at it, what we found over the course of
the second half of last year—which, again, I think leaves us with more
questions than answers—is that the slowdown in productivity was pretty
broad-based across sectors, both public and private. It included some big
employers like hospitality. It was not obvious that this was the slam-dunk,
as it were, to explaining the productivity puzzle—“Oh, it’s just the way we
measure productivity in the UK, and it’s just that we’re better at doing it in
the public sector.” It does seem to be a mixture of measurement
challenges, real whole-economy effects, and then possibly something
around sectoral mixes. It is something that we will have a further look at
between now and the autumn.
Q43 Lola McEvoy: Just a quick one from me. Going back to GDP and the way
in which we measure productivity, household expenditure is the largest
section of GDP. Is the productivity problem linked to the cost of living
crisis, and the cost of living crisis scarring? We know wages are increasing
but it will take a bit of time before people feel better off. Could we
envisage a scenario in which household expenditure goes up, people start
spending more, people are feeling better off, and we see an increase in
GDP because of that, which would then support a better productivity rate?
Professor Miles: I think it comes back to the issue of slack in the
economy. If right now what is holding back economic activity and GDP—to
some extent, anyway—is that demand has fallen a bit short of the supply
capacity of the economy, anything that boosts demand will boost GDP.
There may not be a big increase in employment, but it would show up in
productivity. That is one of the reasons our growth rates of productivity
look a bit optimistic in the eyes of some, because maybe some people are
not factoring that in. There is something of a link between demand,
confidence and productivity. That stops working once you have got up to
full capacity. You need other things to boost productivity then.

Q44 John Glen: Last week, President Trump announced tariffs on car imports.
If those had been in your forecast, would all the Chancellor’s headroom
have been used up already?
Richard Hughes: We looked at a range of scenarios around tariffs. What
the announcement on cars last week amounts to is elements of that
downside risk materialising, but, as of 2023 data, we export about £60
billion-worth of goods to the US, about £6 billion of which—so 10%—is in
the form of cars. That announcement did not affect the whole of our goods
exports to the US. It is elements of that downside scenario that we had
included in our forecast materialising, and we will see whether more of it
materialises.

Chair: For anyone who might be following, chart C in your Blue Book
covers this.

Richard Hughes: Yes.

Q45 John Glen: The key issue that is dominating the news today is what effect
these tariffs will have. I appreciate this is in the context of ongoing
conversations and that the Business Secretary is anxious to say that we do
not want to do anything that will precipitate a worse outcome, but given
that your central forecast is the one most likely to happen, why did you
not explicitly include tariffs in it? You cannot be expected to include
something that happens the day of or the day after, but it surely would
have been reasonable to expect this to have been set out more explicitly?
Richard Hughes: There are two reasons. First, our forecast has to be
based on a forecast for the global economy. We have 50-odd people at the
OBR, and we cannot maintain a full global economic model the way the
likes of the IMF and the OECD can. Like the Bank of England and other
forecasters, we rely on the IMF’s world economic outlook as the global
economy forecast on which we base things like UK exports and imports.
Q46 John Glen: And that does not incorporate the recent changes?
Richard Hughes: The last one was from January, and it did not take US
tariffs into account.

The second reason—as you saw from box 2.2, which we published in the
EFO—is that we did our own scenario modelling of what the impact of US
tariffs might be on the UK economy, including three different scenarios
depending on the escalation of tariffs. We wanted to make sure we were
transparent about what the possible effects might be. The other reason
not to take account of US tariff policy is that it was changing every day,
depending on what phone call the President had had and with which Head
of State. In that sense, it was very hard to choose what day’s US tariff
policy to reflect in our forecast.

In light of that, for reasons of consistency with the IMF WEO, as well as
the fact that tariff policy was changing, we thought it was best to keep US
tariffs out of the central forecast, while making it very clear what the delta
would be if you saw higher tariffs on other North American countries and
China, 20% additional tariffs and then 20% additional tariffs with
reciprocity from the rest of the world.

Q47 John Glen: I recognise that that is a very fair depiction of the
uncertainties, but none the less you are, as we discussed earlier, the
arbiters of what Government policy is, which must evolve in real time. We
will see some economists this afternoon who I think have incorporated
tariffs into their forecasts, and private sector organisations, such as—I
have been informed—Vanguard, have put them into their forecasts. Would
we be wrong to conclude that we should expect to have more from the
OBR on this critical element of how the economy will perform over the
coming months and more forward-leaning expectations around the impact
of tariffs?
Richard Hughes: You have a complete assessment, and I would really
encourage you to read box 2.2, as well as our full assessment of their
fiscal implications at the back of the book in terms of what they mean for
the current balance and net financial liabilities. We are the first official UK
Government forecaster to do this work, and we have done it with 50
people.

Q48 John Glen: Do you want more people?

Richard Hughes: I am very happy with the people I have.

Q49 John Glen: Everyone always says that, but do you need more to be at the
cutting edge?
Richard Hughes: We do our very best to satisfy this Committee’s rightly
high expectations of us. We also compared ourselves with trade modellers
around the country that have made similar official estimates, and so far
we are the only official forecasters that have done it.

Q50 John Glen: Turning to Professor Miles, the theme we are finding is that
there is a grave amount of uncertainty in world trade policy. The
 countermeasures that the respective countries that are most impacted
take are also difficult to compute. Is it fair to say that we should view all
economists’ assessments of future trade policy and economic
consequences with some considerable trepidation?
Professor Miles: Frankly, one can be fairly confident that it is not good
news for anybody. That is a very weak and blindingly obvious statement.
But actually, even that is not quite so obvious, because supposing there is
a very limited tariff war with China, Mexico and Canada—the countries for
which it is pretty clear what Trump is going to do—and that is it, with the
UK and most of the rest of the world staying out of it, it would not be
unreasonable to think that that could be, if anything, very mildly positive
for the UK. There is a bit of trade that will get diverted to the UK, and
some of the exports from, for example, China that would have gone to the
US will need a home in the rest of the world, so stuff will be available a bit
cheaper in the UK than it would otherwise have been.

That is one, not at all central, scenario that is very mildly potentially
positive for the UK, but all the other ones, which involve the UK facing
tariffs, are negative, and they are negative to very different extents. If
tariffs at 20% or 25% were put on the UK and maintained for five years,
our assessment is that what that does is knock out all the headroom that
the Government currently have. Had we made that a central forecast, and
had the Government not changed policy at all, knowing that we were
going to take that as our central forecast, then the headroom would have
pretty much all gone. Of course, that would have been a very extreme
assumption in some ways, because not only would that be as bad as
people might expect in the very near term, it would have been maintained
for five years, which is beyond the next presidential election in the US. I
think that is at the pessimistic end of the—

John Glen: Trump could still be there, if recent reports are correct.

Professor Miles: Apparently so.

Q51 John Glen: Could you help the Committee and those watching to
understand what assessment you make beyond the tariff policy of the
Trump Administration, in terms of broader economic policy, and how that
is reflected in your assessment of the impact on the UK economy? How
does the UK economy respond to the other elements of Trump’s trade and
economic policy?
Professor Miles: It already shows up a bit in confidence surveys,
particularly the ones that have come out in the last couple of months,
after the new Administration in the US and it became a bit clearer to
everybody that the tariff stuff looks like it is going to happen, to some
extent.

Those surveys have affected our assessment of the near-term trajectory of

the economy. We have talked about the downgrade to 1% growth this
year, rather than 2%. That was quite heavily influenced by, particularly,
the business confidence surveys that have come out in the last month or
so, which have been very weak.
 Beyond that, it is very hard to come up with an assessment of what the
impacts of US Government policy might be, for the reasons that Richard
said—it is very hard to work out what they might be. They change not just
by the week, but by the day.

Q52 John Glen: You mentioned the business confidence surveys. My colleague
Dame Harriett Baldwin mentioned them too. Given that some of them
were too proximate to the autumn assessments you made, and given the
experience that you have seen over the last 12 months, will you be
factoring those into your assessments going towards the Budget? Will
there be a greater interest in those surveys, given that they have proved
to be materially consequential to the actual outcomes of this spring
assessment?
Professor Miles: It is fair to say that we always look at those surveys,
which tend to tell you something about where businesses are right now
and what they might do in the next six to 12 months—about hiring and
about investment intentions. I think we were mindful of those in the lead-
up to the October Budget—they just moved a lot subsequent to that.

In a sense, you are spoilt for choice in terms of interpretation, because

there are a lot of things that happened, most of them pretty negative—
interest rates, energy prices, a growing realisation that the US
Administration might go ahead with stuff that people had previously
thought, “Well, that is just noise; they are not actually going to do that.”

We pay a lot of attention to them for the near-term outlook. A lot of the
surveys are really about asking companies and consumers, “How do you
feel right now?” and “What are you going to do in the next six to 12
months?” rather than “Where do you think you will be three, four or five
years down the road?”

Q53 John Glen: They are material to the growth forecast that you are
predicting for the next year.
Professor Miles: Yes, for the near term—absolutely.

Chair: That is certainly going to be an interesting forecast in the autumn,

depending on what exactly happens tomorrow.

Q54 Bobby Dean: Mr Hughes, I would like to go back to the fiscal headroom
question. I think the thing that struck everybody was the restoration to
precisely the same figure we had before, so it doesn’t really look like an
actual output of policy reforms that have been scored—it feels like that
figure was targeted.
Is that the case? Did the Treasury ask the OBR for a balancing figure and
then they found their way towards it?
Richard Hughes: No. You would need to ask the Treasury quite what
they were trying to achieve. Our forecasting models are very transparent,
and the Treasury understands how they work. The policy measures that
they used in the end have quite a direct effect on the level of headroom in
the final year. We aim to be transparent, predictable, boring and
 understandable. We are not in the business of trying to surprise anybody,
be it the Treasury, the markets or yourselves. We are very transparent
about the mechanics of our forecasting—how it works and how it responds
to different fiscal levers on the tax and spending side. The Treasury
understands how our forecast will respond to changes in the post-
measures picture, and you will have to ask it why it decided that outcome.

Q55 Bobby Dean: I am sure we will ask. If we are striving towards a similar
figure, does that not de facto change the fiscal rules? We are not just
seeking a £9 billion surplus. Do you expect to see the same thing happen
in the autumn?
Richard Hughes: Again, that is a question for the Chancellor. One thing I
would stress is that the number is extremely small—it is 1% of total
revenue and spending, and it is for five years’ time. It is akin to asking
somebody who is on average earnings to forecast how much they will earn
and spend in five years’ time to the nearest £200. An awful lot can change
in that time: your employment prospects, lifestyle choices or pressures on
your household budget. Trying to predict where you will end up with that
level of accuracy is very unlikely to be successful.

Q56 Bobby Dean: Do you think this measure within 1% of overall spending is
useful for everybody to focus on? Should there be more flexibility in that?
You can gain flexibility by having greater headroom, as you said earlier,
and traditionally there used to be much greater headroom in these
forecasts. You could also do that through a change of rules. Do you think it
would take some of the heat out of the public conversation around this if
there were more flexibility?
Richard Hughes: There are two things that we are at pains to try to do
every time we present forecasts and wider publications. We stress the
uncertainty around our forecasts and the sensitivities to key judgments, as
well as scenarios around key sources of uncertainty, as we did in this
forecast on productivity, interest rates and trade. We try to draw attention
to the fact that we know better than anybody how uncertain the future is
and how likely our forecasts are to be wide of the mark, in one direction or
another, and the importance of trying to understand what might drive that
and thinking about how you might respond if you end up in those different
situations.

The second thing we really try to stress is that, in addition to doing

medium-term forecasts, we also do longer-term fiscal projections. In many
ways, they tell you some more important things about the outlook for the
public finances, which face the pressures of an ageing society. Public
policy and the public debates about it also need to respond to those
longer-term trends, not just where the economy might be headed in a
given five-year period, which can depend an awful lot on what are
essentially transient factors—be it the level of interest rates, the cyclical
position of the economy and what a particular US Administration are
doing.

Q57 John Grady: Continuing the discussion on headroom, Mr Hughes, in your

 presentation in March, you said, “This Spring Statement breaks a historical
pattern of asymmetric policy responses to forecast changes—in which
windfalls were generally spent but shortfalls were not fully made up.”
Against that background, do you support the Chancellor’s approach of
immediately confronting the reduction in headroom in this way?
Richard Hughes: We do not endorse any policy decision by the
Chancellor. The point I was making is that, from the point of view of
forecasting the public finances in a world where shocks are inevitable, how
policy responds to those shocks matters for the accuracy of your forecasts
and the likelihood of Government meeting their fiscal rules, which is
ultimately the thing we have to assess.

If Governments have an asymmetric response to shocks and they spend

upsides but do not adjust for downsides, you will end up in a different
place from where you are forecasting. We get a lot of criticism for our
forecasts turning out to be wrong, and one of the reasons why they turn
out to be wrong is the asymmetric response to shocks. Governments
spend windfalls but do not adjust—we do not have a good word in English
for the opposite of a windfall—for downsides. For that reason, one thing
that can help secure the trajectory of a given forecast and reduce the risks
around a given set of fiscal rules is to ensure that the policy reaction to a
deterioration in the forecast is as symmetric as the policy reaction to an
improvement against it.

Q58 John Grady: When looking at your own finances, would you try to adopt a
symmetric approach to such shocks and windfalls, if properly advised?
Richard Hughes: I am trying to think back to whether I have—probably
not as much as I should, I suspect.

Q59 John Grady: In chart 7.2 of your report, we see that headroom averages
£30 billion, but after Mr Sunak’s last Budget, in March 2022, it is around
£10 billion, so over the last three or four years there has been much lower
headroom—it is not a new turn of events. Presumably, if we were to
expand it up to £30 billion, that would involve a significant blend of tax
rises and spending cuts. What would be the outcome of moving too quickly
on that?
Richard Hughes: I suppose that those decisions, as well as where they
set their fiscal rules, remember, are for the Chancellor of the day.
Headroom is an artefact of where fiscal policy is set relative to the rules
the Chancellor sets for themselves, and Chancellors can choose to have
tighter or looser rules. How much headroom they leave against them once
the rules have been set is a decision that they then make. To be honest, in
recent years we have seen Chancellors setting increasingly loose fiscal
rules, relative to the past, and setting aside relatively little fiscal headroom
against relatively loose fiscal rules.

Q60 John Grady: This may be a question for Professor Miles. If we carried out
significant spending cuts and tax rises to get us back to £30 billion, what
would that do to growth in the short run?
 Professor Miles: I think it would depend on what the plan was to get
back to a much higher number. The number at the moment is a number in
five years’ time. A policy that gradually had some combination of lower
spending and higher taxes, which mainly happened beyond, say, two
years in a three, four or five-year programme, would have a lot less of a
negative impact than if you said, “We’re going to try to get to a current
fiscal surplus by the end of this year.” That would mean pretty dramatic
increases in tax and cuts in spending. It is a five-year horizon at the
moment—it is planned to become shorter, and it will become three years
within a couple of years—and that means that you could have quite a
material impact on headroom without having to slam on the brakes right
now.

Q61 John Grady: If you slammed the brakes on, that would be damaging to
growth.
Professor Miles: Slamming the brakes on is generally going to do a bit of
damage in some way.

Q62 John Grady: The other thing that some people are saying is that the
Government should just increase borrowing. Professor Miles, what would
be the risks of increasing borrowing and an associated change in the
Chancellor’s rules?
Professor Miles: I think the risks are very difficult to judge, because you
have to get in the mind of the people who might buy gilts—or, rather,
people who would decide not to buy gilts if they thought that the
Government were going a bit soft on the fiscal rules by borrowing a lot
more. The Government are going to have to issue a lot of Government
bonds, gilts, this year anyway—something like £300 billion, which is a
historically extremely high number, both absolutely and relative to GDP.
They probably have to issue substantial amounts of new gilts next year as
well, and that is before you factor in the Bank of England running down
the stock of gilts that it has bought.

One way or another, the UK Government are going to have to sell an awful
lot of Government debt over the next few years. Of course, nobody who
buys gilts has to buy gilts. People can decide, “I don’t feel quite so
confident about the UK; I will buy gilts at a price, but that price is not an
interest rate of 4.5%”—it could be 5% or 5.5%. With the stock of debt as
big as it is, that has a material impact on the fiscal position. I think one
can see why a Government might be wary of saying, “Just borrow some
more, because we’ve had a bit of bad news, and don’t adjust on other
margins.”

Q63 John Grady: If I have this right, Government borrowing costs increasing
to, for example, 5% or 5.5% would feed through to the public finances
quite significantly, because we have a large amount of debt—almost 100%
of GDP, so we are quite unlike Germany. Additionally, however, because of
the way in which people price private sector debt and equity, it would
increase the cost of debt and equity for businesses developing houses or
investing in wind farms, for example, which would feed through to
 consumers, and it could be very damaging for economic growth. Have I
understood the broad contours of this issue correctly?
Professor Miles: Yes, I think you have. A generalised rise in the level of
interest rates is not just going to affect the Government payments on the
outstanding stock of debt; it is likely to have knock-on effects on the cost
of mortgage borrowing for households and for companies borrowing
through the banking system. The impact is not just on the Government
fiscal position.

Q64 John Grady: If a family has just bought a house in Mount Vernon in my
seat, is it in their best interests, from the point of view of their mortgage
rates, that the Chancellor of the Exchequer does not radically increase
borrowing?
Professor Miles: I think it is in everybody’s interests if the Chancellor of
the Exchequer and the Government are wary of the potential knock-on
impacts on the cost of borrowing. It would depend on what your
constituents’ mortgage situation is—whether they have fixed the rate for a
long time or not. The chances are that they probably have not fixed it for
five or 10 years; it might be just a couple of years. I am not saying that
this will happen, but if, two years down the road, it were the case that gilt
yields and the whole level of interest rates were 50 or 100 basis points
higher, it would affect the cost of their mortgage when they remortgage.

Q65 Dr Sandher: Mr Josephs, could you tell me how much the impact of
changing interest rate forecasts in your budget affects the fiscal space the
Chancellor has in year 5? Just qualitatively, not quantitatively.
Tom Josephs: As I said earlier, the increase in interest rates that we saw
compared to our last forecast in October was around 50 basis points on
average. That was enough to eliminate the fiscal headroom the Chancellor
had in October, which was about £10 billion. Looking forward, we have
some sensitivity analysis in the book, which shows that a 60 basis point
increase would be enough to eliminate the headroom.

Q66 Dr Sandher: How does the OBR forecast interest rates?

Tom Josephs: We take market expectations.

Q67 Dr Sandher: There has been quite a lot of volatility in market

expectations recently—I think 0.5% of the standard deviation. Do you
think that change in interest rates might be noise rather than signal, in the
sense that it is moving around quite a lot?
Tom Josephs: It is certainly the case that interests rates have been very
volatile recently. Again, we have some analysis in the book of the kind of
range we have seen since our last forecast, and what it would do to the
fiscal position if interest rates were at either end of that range. It is
certainly the case, as you say, that that volatility adds a significant
amount of uncertainty to the forecast. We take market expectations over a
10-day window. That average of market expectations over that window
aims to smooth over a bit of that volatility, but we cannot get rid of all of
it.
Q68 Dr Sandher: By extension, the 10-day period you choose has a huge
impact on spending decisions in five years’ time. I know there is a huge
amount of volatility, but the 10-day period you choose at this point in time
is having a huge impact on spending decisions and possibly tax rises later
on.
Tom Josephs: The 10-day window is what we use for the forecast, and as
you say, that has a big impact on the fiscal numbers, given the sensitivity
of the public finances to interest rates. We reserve the right to adjust that
if, after we have taken the window, there has been a big change one way
or another that we think, going to your point, is sort of signal rather than
noise. That has not been the case this time; I think rates are now around
just 10 basis points or so higher than the window we took.

Q69 Dr Sandher: You tend to use your forecast model to come out with the
other outputs, but with the interest rate assumption, you take the market
forecast. Why that difference?
Tom Josephs: For us, that is the best source of information on the future
path of interest rates. We take a similar approach for other market
determinants—for example, for energy prices, where you have a very
liquid forward market, we use market expectations. It is not just an
approach we use for interest rates; we use it in quite a few areas of
forecast.

Dr Sandher: That is very helpful.

Q70 Yuan Yang: On the question of welfare reforms, I note that in the
preface, you have written that “details of the policy package were sent to
us very late in the process, and late notice of changes and incomplete
analysis hampered our ability to reflect these measures in our forecasts.”
To begin with, I want to ask about the timeline itself. You set out very
clearly that, on 12 March, the Treasury gave you what you thought was a
final package of measures; on 18 March, you sent them a near-final fiscal
forecast, and one day later, on 19 March, you received final policy
decisions from the Treasury. Looking at that process overall, how normal
is that timeline? Were there surprises on your side, or on the Treasury
side, from each other’s movements?
Tom Josephs: The basic timetable that we have set out in the foreword is
the standard timetable that we use for all events. Most of it was followed
in the normal way, and the process ran smoothly. The exception that we
highlighted in the foreword was on some of the welfare reform policies,
where we received the information on the costing of those policies later
than is normal; also, in some cases, the amount of information analysis
provided to us on those costings was less than we normally expect.

It might be useful to go back to the questions asked at the start about

how that process works. Policy costings—the impact of policy on the fiscal
numbers, what we call the direct effects—are produced and owned by the
Government Departments responsible for the policy. Our role is to certify
that we think the costing is reasonable and central. There is always an
iterative process, where the analysts send us their estimates and,
 typically, we go back and ask for more analysis and more evidence before
we ask them to change the costing. Eventually, we get to a point where
we agree it is reasonable and central, and we put it in our numbers. So
that happened on this one, but it just all happened later.

Q71 Yuan Yang: When you talk to the Department responsible, does that
mean a conversation between you and DWP, or is it the Treasury in this
case?
Tom Josephs: On welfare, it is DWP.

Q72 Yuan Yang: You mentioned that some of those costings were incomplete
or some of the analysis was incomplete. Could you go into a bit more
detail about what was lacking? What would you have needed to make a
better or fuller forecast?
Richard Hughes: We received some of these costings later than normal,
so we have less evidence and analysis than normal, particularly on some
of the behavioural judgments that we need to make these costings. That
relates to how the people affected might respond to the changes that are
made, which is quite a complicated thing to model. Say you are trying to
anticipate what happens if a benefit becomes less generous. An example
in this package is the Government has made the universal credit health
element less generous. That has a direct impact on the cost of the welfare
bill, but you might also expect people to respond to that. It becomes a less
financially attractive benefit, so some proportion of people will face an
increased incentive to work rather than claim that benefit, for example.
That kind of analysis was not as complete as we would normally expect.
We did do that assessment, but we have said that the costings are even
more uncertain than normal because we did not have the usual amount of
time and evidence that will allow us to do that.

Q73 Yuan Yang: Does that mean that we should expect an update to those
forecasts in the autumn outlook?
Tom Josephs: Yes. In our next forecast we will do a fuller assessment of
the costs of those policies.

It is also the case that the Green Paper on welfare reform set out a very
wide range of reforms, some of which we have included in the numbers in
this forecast, and some of which we have not, because the Government
did not set out the final details in the Green Paper. That is normal
practice—they will be doing further consultations on some of the policies,
and some of the policies are just at a very early stage of development,
and they will announce further details. In the autumn—or, whenever our
next forecast is—we will look back at the costings we incorporated at this
event, and we are also likely to have the final details on the whole wider
set of policies that we will incorporate.

Q74 Yuan Yang: Just to summarise, you are planning to bring in the forecasts
related to the employment support package, which was not scored this
time, in the autumn, and also relate it to the behavioural changes and
other parts of the welfare packages, which did not come in sufficient detail
 this time? Is that broadly right?
Tom Josephs: There are a couple of different elements of this; there is
the direct impact of these policies on the public finances, and what we call
the indirect effects on the wider economy—in particular, in this case, the
impact on employment and labour supply. We did not make any
assessment at this event of the impact of the welfare reforms on labour
supply, because we were not provided with enough evidence to enable us
to do that, and we did not have time to do an assessment ourselves. We
will do that in the autumn. As I said, once the wider set of policies have
been finalised, that will allow us to do a full job on that.

Q75 Yuan Yang: Do you plan to publish any analysis of welfare-related

changes before the autumn? I note that in previous summers you have
published papers describing the overall trends.
Tom Josephs: I do not think we have any plans at the moment to do
that. Some of the timing on this depends on the point at which the
Government finalise some of their policy decisions on the wider package.
There are some pretty big reforms in the Green Paper that we did not
include in any way in this event. For example, the Government have said
that they are going to completely scrap work capability assessments,
which is the criterion currently used to assess whether people get the
universal credit health element. We have not made any assessment of that
currently, but that could have some pretty big implications. They have also
said they will do a full review of the personal independence payment
assessment criteria. Anything we do will essentially depend on the timing
around when the Government make their final decisions on those policies.

Q76 Yuan Yang: In the play of events from 17 March to 19 March, was there
any surprise on either side? Were you surprised by being given more
measures to score? Was the Treasury surprised by what you have given
it? Was there a level of miscommunication? Could you explain what was
happening in those few days?
Richard Hughes: Our forecasts are always full of surprises. We were
forecasting in the middle of covid, and in the middle of Russia’s invasion of
Ukraine. Unexpected things always come up. In this case, as Tom was
saying, we agree a set of deadlines for notification of measures, so that
we have time to do our scrutiny properly. In this case those deadlines
were not adhered to; also, a number of measures were notified to us after
the deadlines were agreed. We did our best to provide our best
assessment of those policies, but for the reasons Tom outlined, some of
them were incomplete, and we will have to come back to in the autumn.

Q77 Chair: It is interesting, because, Mr Hughes, you said earlier that the
Treasury “knows how our forecasts work”, and, Mr Josephs, you have
leant very heavily on the word “normally” and saying things were “later
than normal”—I have not added up how many times you said that. Given
that the Treasury and the DWP knew the deadlines and what was normal,
why was it that you got it all so late?
 Richard Hughes: That is a question for the Treasury. We received it
when we received it. The Treasury knows how our macro forecasts work,
but in the end, the job that we do, and in particular the job that Tom does,
is to make a set of specific judgments about specific policy changes, all of
which end up being unique, because that is in the nature of policy reforms.
We have a pretty consistent track record that people can look at of how
we treat different kinds of tax and spending changes. Wherever we can,
we try to be as transparent as we can about explaining how those
judgments work, what models we use and what elasticities we use to
estimate different behavioural responses, but in the end, there are
discussions that we have with the Department and judgments that we
have to reach to make sure that our judgments are central. We also try to
learn from that experience, because often those judgments turn out to be
wrong and we have to adjust and think, “Actually, we got it wrong last
time, so we have to take a different view this time around.”

Q78 Chair: There must be a bit of gaming in this, because everybody knows
the deadlines. The planning stuff was scored this time. The welfare stuff
will now likely be scored in the autumn, which may impact headroom. Do
you think that any of that has happened in this case?
Richard Hughes: I do not know. We try to make sure that the risks
around our forecasts are symmetric. To the extent that things go up or
down, the changes that we make to our judgments are not biased in one
direction or another. We are not consistently optimistic when we first look
at it and then revise down, or consistently pessimistic when we first look
at it and then revise up. We try to make sure that, especially when we are
revising judgments around costings, the judgments go in both directions.

Q79 John Glen: Whether or not there is consensus on the quantum, It is quite
clear, directionally, that it is going one way or the other. Nobody, even the
Government themselves in their impact assessment on the Employment
Rights Bill, is saying that it will be anything other than a cost of up to £5
billion. You must have a sense of the net effect of things that are held
back that will be negative in future and things that have been moved
forward that will be positive, as with the planning and infrastructure thing.
Richard Hughes: In some cases. In a package like this on welfare
reform, there is a bunch of different reforms to benefits, reforms to
support being provided and a number of different incentives going in
different directions. You have to look at those things in the round. In other
areas, such as trade—as David said, putting in place more restrictions on
global trade around the world will not be good for global output—it is
pretty reasonable to say that the direction of that will be down, with the
exception of a few limiting cases.

Q80 Bobby Dean: To probe on this a little further, your answers around the
uncertainty of the indirect effects, particularly on the labour market, are
similar to an answer the Chancellor gave me last week in the response to
the spring statement. My question to her and to you is: could it also go
the other way? The Chancellor’s pitch is that more people will end up in
work, so this will end up improving the country’s finances overall—by the
 time we get to the autumn forecast, things should look better. But are
there risks going in the other direction—impacts on public services, and so
on?
Tom Josephs: Specifically on the welfare reform package, as I said, we
have not made an assessment at this point of the impact on employment.
It is difficult to say at the moment what the overall impact would be
because there are different parts of the reforms that potentially push in
different directions on employment.

There is an increase to the universal credit standard allowance, which will

be received by around 7 million families. An increase in the generosity of
that might reduce work incentives. It is quite a small increase, but it
applies to a lot of people. Going in the other direction, is the fact that the
universal credit health element has been made less generous, which
potentially increases work incentives. The changes there are bigger, but
they apply to a smaller population, although it is a population that is
typically more distant from the labour market. The balance of those two
effects is not clear cut.

There is also funding for a relatively large employment support

programme. You would expect that to be positive in terms of employment,
but the scale of that depends on the detail. Past experience is that it is
quite difficult to get really big results from employment support
programmes. As I said, there are also a lot of other elements in the Green
Paper where the Government have not finalised the reforms yet, so it is
very difficult at this point to gauge what the employment impacts might
be. That is why, at this point, we have not done an assessment.

Q81 Bobby Dean: I understand that you have not yet done the full
assessment; I am just trying to get a sense of the direction. You said that
there is pressure in both directions, but it feels to me that it should end up
being net positive for the public finances overall, but maybe not to a large
extent. Or do you think there is a risk that this could end up reducing the
headroom in the forecast by the time you look at this?
Tom Josephs: You say “positive for the public finances”. The package has
certainly generated quite a significant saving in welfare costs: the bits that
we have scored already add up to a saving of around £5 billion. That is a
significant saving, but the wider employment effects and the knock-on
they might have for the public finances is where we are saying that the
net impact is unclear.

Q82 Bobby Dean: Is that to do with the fact that the large bulk of the savings
have been driven by changes to PIP, which is obviously not exclusively for
people who are out of work—it applies to people both in and out of work?
Does that add greater uncertainty about the employment benefits? I am
pushing you on this because a lot of the press coverage over the last week
has been betting big that these welfare reforms are going to drive lots
more people into work and are going to have a substantial impact on the
economy.
 Tom Josephs: The changes to the personal independence payment are
the element that makes the largest fiscal saving, by essentially making the
criteria to become eligible for PIP more difficult in the future. Our current
estimate is that, over five years, around 800,000 people who would have
been eligible for PIP will no longer be eligible. We have not assessed the
impact of that on employment, and it is difficult to make an assessment
because, as you say, PIP is not a work-related benefit and a large
proportion of people who claim PIP are quite distant from the labour
market.

Q83 Lola McEvoy: I want to ask about the 800,000 figure. I thought your
2024 welfare trends report was a fascinating read—I read it a few times to
get my head around it. It explained that the increases in the number of
claimants often come from claimants transitioning from legacy benefit
systems, and how the numbers seem to be higher but, when it is
explained on a graph, you can see that those people were already in the
system, just under a different benefit name. You gave a figure of 800,000
people who would have been eligible for PIP but are no longer eligible. Is
that based on a trajectory that includes those legacy benefit increases, or
is it with the legacy benefit increases taken away?
Tom Josephs: I am glad you enjoyed the welfare trends report. It was
primarily focused on incapacity benefits rather than PIP, although we did
also include some analysis of PIP. Over the last few years, there has been
a transition from the previous system to universal credit. That is what you
are referring to—the big transition from people on the old benefits to
universal credit. But the report also shows that, in addition to that
transition, there has been a big increase in the underlying number of
people—in the caseloads.

As Richard mentioned earlier, there are a number of probable drivers of

that. It seems quite likely that part of the reason is that the underlying
health of the working-age population has declined. The working-age
population is ageing due to demographics, but there is also evidence that,
even among the younger population, issues such as mental health
conditions have increased over the past few years. That is probably driving
some of the caseload increase in the forecast.

We also think it is quite likely that economic factors are driving it as well.
In particular, cost of living pressures since the pandemic clearly increase
the financial incentive to claim these benefits, which are much more
generous than the standard allowance under universal credit. The welfare
trends report shows that it is also quite likely that changes in the
operation and structure of the system have also contributed.

Q84 Lola McEvoy: I thought it was very interesting that chart 3 of the report
said that 20% were new claimants, and that the biggest significant change
in the increase from 2018-19 to 2023-24 was due to the lack of drop-offs.
Could you elaborate a bit on that?
Tom Josephs: This is the increase in the caseload, roughly since the
pandemic. As you say, the analysis shows that a small part of it is just
 more people putting in claims, but the bigger part of it is that fewer people
are dropping out during the assessment process, and that approval rates
are higher. It is difficult to understand why those things are happening.
We hope we can do some further work on that with more data from the
DWP.

To go back to the point I was making earlier, it could be because people

are coming with worse health conditions, which means they are less likely
to drop out and the approval rates are likely to be higher, but it seems
likely that that is not the only driver and that there are other factors within
the operation of the system driving that trend. Financial incentives are
also potentially a driver. If people have more of a financial incentive, they
are potentially less likely to drop out. I am sure the assessors factor in the
financial benefits when they make their decisions.

Q85 Lola McEvoy: I would be interested in that. When you speak to people in
receipt of any of these benefits, they don’t say it is an easy process. It is a
very complicated, difficult and strenuous process, especially if you are
disabled or unwell.
Can you clarify two things? You just made a point about the financial
incentive from the assessor’s point of view. In 2017, the last Government
brought down a mid-range universal credit element that was for limited
capacity for work, rather than for limited capacity for work and work-
related activities. Because that was brought down to the same level as
standard universal credit, we ended up with the higher rate seeing an
increase. Can you elaborate a little about the assessor’s point of view on
that?
Tom Josephs: I think the point you are making is that, after that change,
approvals into the higher group increased quite significantly. We do not
have any clear evidence on assessor behaviour, I should say, so I cannot
give you a definitive answer on that, but—

Chair: It is potentially a perverse outcome.

Q86 Lola McEvoy: Finally, just to be 100% clear, in your projections, where
you have scored the welfare changes, on the trajectory of increased cases
you have not included legacy cases going into the system—the transition
from the old system to the new system.
Tom Josephs: That is in the baseline forecast.

Lola McEvoy: It is? Okay.

Q87 Yuan Yang: I want to continue with one of the themes that Ms McEvoy
brought up. In the 2024 welfare report, and elsewhere in the OBR
publications, you refer to the “financial incentive” to applying. There is a
lot of stigma in the media right now about fraud—incorrect claimants
gaming the system, as it were—and the term can be interpreted in a
variety of ways. Could you explain how you see financial incentives
encouraging people to apply or stay in the system, rather than drop out, in
relation to the broader issue of fraudulent claims?
 Tom Josephs: In the assessments we have made of the welfare reform
packages, when we have looked at responses, we are not really looking at
whether people are going to make fraudulent claims. What we are looking
at is purely how people respond to the different financial incentives in the
system and the various changes that have been made to the gateway
assessments for the benefits. There is a much more generous award for
people who have health and disability conditions than for those who do
not, and the Government’s stated aim as part of their reforms was to start
to narrow that gap.

The area where this was the biggest consideration in the assessments that
we made of this event was the impact of the changes to the personal
independence payment gateway criteria. Essentially, the Government
tightened the criteria to make it more difficult for people to become
eligible for the benefit. We applied the new criteria to the past results of
the assessments that have been made, as DWP has a record of all the past
scoring that people have made against the criteria. That led to an
assessment that around 1.5 million people would no longer be eligible for
the personal independence payment. But we then assumed that, in the
future, people will respond to the new criteria, given the financial
incentives, and that people will be able to bring forward new evidence and
demonstrate that they are able to meet the new criteria, which they might
not have done in the past.

Q88 Yuan Yang: So people will put more work into getting the right doctor’s
assessments and so on. There is no claim from the OBR that that evidence
is mistaken and that people will be driven to—
Tom Josephs: As I say, this is not about fraud. It is about people’s
incentive to provide evidence, the assessments that they make of
themselves and their conditions against the criteria, the sort of advice they
might receive and, again, how assessors might respond. A judgment
needs to be made on the criteria, and it is not a clearcut division; it leaves
room for a lot of judgment. As I say, we think that will lead people to—

Q89 Yuan Yang: There is also the implication in a lot of media discourse that
the increase in PIP caseloads is not matched by an underlying increase in
disability and that, therefore, there is some gaming. Do you see that in
the data that you have looked at?
Tom Josephs: Richard spoke on this earlier. There is evidence that there
has been a deterioration in some areas of working-age population health,
particularly starting around 2018 and then after the pandemic. There is
evidence of an increase in mental health conditions, particularly among
younger parts of the working-age population. But it also seems to be the
case that that is not the only driver of the caseload increases we have
seen since the pandemic. As I said earlier, it looks like economic factors
may also have been driving that, and potentially issues around the
operation of the system.

Q90 Rachel Blake: I want to come on to one of the other policy measures,
which is around house building. Last time we were here, you said that you
 did not have enough detail to do the scoring, and now we are seeing a
material, additional and durable impact on transactions and potential
output. Professor Miles, could you talk us through some of the
methodology that got you to the point where this could be scored?
Professor Miles: We looked at a range of evidence, and we spoke directly
to house builders about how they saw it and what they were going to do.
Among the larger house builders—not all of them, but the ones we spoke
to—there was a pretty positive response as to what they will do, certainly
in the longer term. They were keen to point out that there will be time
lags between the new rules and when they actually start building more
houses, which seems very plausible. That was perhaps our single biggest
source of information.

Q91 Rachel Blake: May I pause you there? What happened between their
saying, “Yes, we quite like this,” and your putting some numbers to it?
Professor Miles: We got some detailed information about where grey-
belt land—land that was previously green belt, which you could not hope
to develop—might be and what incentives there might be, both
numerically and money-wise, if land that you previously could not build on
now became available. Those incentives looked pretty strong, depending
on where you were in the country. They were stronger in the south-east
than they were a long way from the south-east.

We had a long, hard look at capacity constraints in the residential

construction sector, which, in the short term, seemed very material. They
add up to a time lag. Essentially our central forecast was that you got very
little boost to house building this year, and not a whole lot next year. It
really was backloaded to years 3, 4 and 5 of our forecast horizon.

It seemed pretty clear, whichever way you looked at it. If, as a likely side
effect of the new planning rules, there was land, particularly in the south-
east, that you had not had a hope of building on before, now there was a
realistic prospect of doing it. Given the difference in the value of land—let
us say it is agricultural land—relative to developing it as housing, in
principle there is now a very big incentive. We have probably all heard
house builders saying for several years that they are held back by one
aspect of the planning system or another. The quantification of how big
and how quickly it comes through is something about which it is difficult to
be very precise. Our numbers are that by the end of the forecast horizon,
which is five years down the road, on our central estimate some 70,000
more houses will be built than otherwise would have been built.

Q92 Rachel Blake: Do you anticipate scoring the Planning and Infrastructure
Bill?
Professor Miles: It depends on what detail we get on it. The residential
stuff was much more developed, and it was very clear what some of the
rules were. We are not in the same place on the infrastructure stuff. When
we get more detail, we will certainly look into that.

Q93 Rachel Blake: So it is feasible that development corporations might be

 scored. In terms of decision making, they could move development
forward.
Professor Miles: Yes. We are open-minded, once we get more detail on
the thing to look at it and see what size of effect it might get.

Q94 Rachel Blake: And there is a particular element to the overall market. In
London, £4 million a day is spent on temporary accommodation, which is
private rented accommodation that local authorities lease. Is it possible for
you to forecast and model the impact of a reduction in terms of positive
growth, or is that—
Professor Miles: A reduction in which element?

Rachel Blake: In temporary accommodation costs.

Professor Miles: Do you mean as a side effect of the planning reforms?

Rachel Blake: Yes.

Professor Miles: Yes, in the sense that we have an estimate of how much
lower house prices, and therefore rents, are likely to be as a result of
building the houses. Although it is quite a big impact on the number of
new houses built, the impact on things like rents and house prices
depends on how much you move the stock of housing. Because the flow of
new house building is small relative to the stock, even though you have a
material impact on house building, there is not an enormous impact on the
stock, even three, four or five years down the road. The knock-on impact
on house prices and rents is therefore pretty small. It builds up over time.
It will be bigger in 10 years than in five years, and bigger in five years
than in two years.

Q95 Rachel Blake: Would it be fair to say that the impact on rents is the
closest that you would get to it, and that the cost to local authorities
hasn’t, at the moment, played into your modelling?
Professor Miles: It is too limited an impact to have a material effect on
the forecast horizon, on that element of it.

Q96 Chair: You need to have a very clear figure of social housing, presumably,
to be part of that. Is that correct?
Professor Miles: I think you would need a very clear idea of that.

Q97 Chair: And geographically?

Professor Miles: Definitely geographically, yes. We have skewed our
estimates on where the house building comes, and on the size of the effect
on the economy. We have not assumed that there is going to be more
house building, evenly spread across the country. There are stronger
incentives in areas where house prices are higher, such as in the south-
east.

Q98 Rachel Blake: I would like to understand in detail where we lost those
200,000 houses from the Government’s target. You have forecast 1.3
million.
 Professor Miles: To a significant extent, it is about time lags. We don’t
think there is likely to be any impact on the scale of house building,
certainly not this year and possibly not even for most of next year.
Therefore, you don’t approach 300,000 houses built in the UK until year 5.
You are short of that all along the way. That is the major reason why you
don’t get to the Government’s target, and why you get closer to it by year
5. We think those effects are likely to be persistent, unless there are
further changes to the planning system, and they will last beyond year 5.
We have come up with some estimates of where you get to beyond year 5.

Q99 Rachel Blake: Are you able to determine whether it is more in terms of
land supply or the capacity in the sector, or is it an aggregate of those two
factors? Obviously, you can move capacity in the construction sector more
easily than changing land supply.
Professor Miles: It is the effect of both things combined. If you have
more land but there isn’t capacity to build houses, that is what holds you
back. If you have the capacity to build houses but you don’t have the land
with the permission, that is going to hold you back. In the very short
term, the time lags are about both getting the permission and building up
capacity in the industry.

Once you look beyond a few years, even though at the moment there may
be shortages of people with the relevant skills in the construction sector,
you then start trying to address questions about apprenticeships and
training people. If house builders believe that these are the new rules of
the game, they are more likely to expect stronger demand in the future,
and more willing to take on apprenticeships and to train more people.
They might not have done that if there hadn’t been the planning reforms.

Q100 Chair: Mr Hughes, I want to go back to the information released about

your forecast. The final submission was sent out to about 102 officials,
mostly in the Treasury. Ministers, six special advisers, the head of the
special advisers’ office, who may be a civil servant—some spads are civil
servants, technically, but I think they are a slightly different category—and
some press officers were included in that list. Prior to the leak, or the
release of the information, on 11 February, you had four meetings that
included special advisers. Was it the same special adviser at every
meeting, or was it a different mix of those six people?
Richard Hughes: I am trying to think back. We had two meetings that
included special advisers alongside officials, and then two meetings that
were with special advisers and Ministers. My recollection is that it was
always the same special adviser.

Q101 Chair: It was one special adviser?

Richard Hughes: I believe so, yes.

Q102 Chair: Are you able to tell us the name of that special adviser?
Richard Hughes: You could ask the Chancellor, who was in the meetings.

Chair: For the record, an email was sent out on 7 February that didn’t
have any special advisers copied in. We have had 15 years of the OBR,
and there has never been a leak of information. You are very clear that it
is not from your team.

Richard Hughes: I am very confident of it.

Chair: We have obviously been asking the Treasury about it, as well. It is
helpful for that to be clarified. While we have been sitting here, the UK
Statistics Authority and the Cabinet Office have announced a review, led
by the UK Statistics Authority’s Sir Robert Devereux, so it is an issue that
we are pursuing with our sister Committee.

This has been a really useful session, so thank you for your time. In
summary, we have learned that various Chancellors’ decisions to leave
themselves very little headroom mean that much greater attention is paid
to small changes in your forecast. As we have heard from the Bank of
England, the uncertainty about the ONS data is affecting your forecast, so
I think the review is welcome to us all. We have also heard that a 50 basis
point increase in interest rates was sufficient to use up the Chancellor’s
headroom, so we are working with quite small margins.

Before this session, it was an area of interest to us that the Treasury

missed the pre-agreed deadlines for submitting policy changes, which
prevented you from including the changes in your forecasts. Thank you for
your answer about that. We heard from Mr Josephs that even when that is
clearer, there are challenges in determining the impact because of the
complexities of interactions with the welfare changes. That is something to
watch in future.

I thank you for your time. The transcript of the session will be available on
the website, uncorrected, in the next couple of days.