It’s all change at Westminster, and the new UK Government used the King’s Speech earlier this week to set out its legislative agenda. It’s an ambitious set of bills, both in terms of scope and in its numbers – one of the largest for a while – and we’ll cover some of the bills in more detail in due course.

One of the main things that caught our attention as fiscal hacks was the ‘fiscal lock’, which is the implementation of a Labour manifesto promise to ensure that major tax and spending policy announcements are independently assessed by the Office for Budget Responsibility (OBR), in an effort to avoid the ‘mini-Budget’ debacle of late 2022.

While this is a welcome commitment from the new Chancellor, it is unclear that the new so-called ‘Fiscal Lock Law’ – which seems is actually an amended version of the Charter for Budget Responsibility, which governs the OBR’s relationship with the government, and relies on the Budget Responsibility and National Audit Act 2011 – is meaningfully impactful or necessary at all.

The updated draft Charter was published yesterday and sets the threshold for ‘major’ permanent policy announcements at 1 per cent of GDP (around £30 billion this year) in gross terms – which means that if each of combined tax or spending decisions exceed that threshold, then the OBR will be compelled to present an assessment of its cost. This doesn’t necessarily mean a full forecast, but it does mean some sort of public announcement and publication. There are also a few additional provisions for temporary large announcements in response to an emergency – designed presumably to avoid stopping the government being able to flexibly respond to crises like it did during the pandemic.

The chart below shows what the ‘fiscal lock’ would have meant for previous fiscal announcements. A few things spring to mind when eyeballing it – namely that the mini-Budget was large, but not that large in terms of historical fiscal events when simply considering policy as a share of GDP – it did breach the threshold, but not massively so. The 2020 Budget had a large fiscal loosening as a share of the economy, for example. In fact, after nearly 10 years of relatively small fiscal announcements, the chart shows that fiscal policy announcements have recently been increasing significantly in size.

It also becomes clear that it was the biggest non-pandemic related event to not come with a forecast, which some have claimed was the reason for the disastrous market reaction that followed. And the fiscal lock appear to be exactly calibrated to capture that particular event.

Chart: Major fiscal announcements since the OBR was created, with shaded bars indicated cases where a forecast was not released concurrently

Source: OBR, FAI analysis

But there are two reasons why we might think that this ‘fiscal lock’ isn’t particularly necessary. The first is that there is no reason to suspect that Rachel Reeves’ statement that she will not make major announcements without an OBR forecast is not credible, and therefore it doesn’t seem like this action will particularly add much value.

But more importantly, there is a question as to whether focussing on OBR scrutiny is really the right lesson to learn from the late 2022 market turmoil. This boils down to whether the chaos that ensued was a question of form or substance. The fiscal lock focusses on the form, but there is (perhaps much more persuasive) argument that in fact it was the policy itself that was the issue. The UK has an ageing population that will require higher public spending, and cutting taxes on a large scale meant entrenching a larger deficit that would cause the stock of debt to grow even more rapidly – at a time when it’s already pretty high by historical standards.

This would also be consistent with the markets returning to calm after then-Chancellor Jeremy Hunt reversed nearly all the tax cuts. And with both the previous and current UK Governments committed to a path of rising taxes as a share of GDP, the main issue from the mini-Budget appears to have been address.

But only a cynic would accuse a Chancellor of using a particular piece of fiscal legislation to score a political point.

We’ll need to wait longer for labour market statistics

This week also saw the ONS announce that it will delay the full implementation of the Transformed Labour Force Survey (TLFS). The TLFS is the replacement for the LFS, whose low and declining response rate caused the ONS to withdraw its accredited official statistics on the labour market last year, and it was hoped that the TLFS would solve many of the data issues we have faced in the last 12 months.

Alas the job is not yet complete, and the ONS has said it will dual run both surveys for a further six months. Dual running allows benchmarking of the new survey’s results, which should eventually lead to higher quality and more trusted results – and it was in this process that the ONS found some discrepancies with the sampling and its representativeness, which it says it will now look to address.

In the meantime, we continue to have a temporary labour market set of series based on HMRC data and a reweighted ‘old-style’ LFS. But while GB results might be more robust after reweighting, the small sample size means it’s difficult to know much about the labour market at sub-GB levels. And that is to say nothing of the difficulty of the Bank of England in setting monetary policy with a missing key piece of the labour market puzzle. The Monetary Policy Committee must surely be crossing their fingers that the full launch of the TLFS comes soon.