Reeves on the brink after 'misleading' public with 'smoke and mirrors' over £20bn Budget black hole

Tensions escalated between the Chancellor and the Office for Budget Responsibility (OBR) on Friday night after the watchdog released a detailed account of its conversations with the Treasury ahead of this week’s Budget.

The Chancellor had repeatedly talked down the state of the nation's finances in the build-up to her fiscal statement on Wednesday.

According to the OBR, recent comments from Reeves and her team overstated the size of the fiscal gap, setting the stage for her planned tax rises and changes to welfare spending.

She placed the blame on Brexit, Tory austerity and Donald Trump for a downgrade to the UK's predicted economic productivity, which would therefore make it harder to meet her own spending rules.

The positions of both Ms Reeves and Richard Hughes, the OBR chairman, came under scrutiny after the Treasury criticised his decision to reveal the “private space” in which officials discuss forecasts and assess policy impacts.

Read more: What's in the Budget? Key points at a glance

Read more: Downing Street denies Rachel Reeves 'misled the public' over state of UK finances before Budget

Mr Hughes is due to appear before MPs on the Treasury select committee next week, while Ms Reeves will be pressed on her conduct during Sunday’s political television interviews.

The disclosures come after weeks of briefings from Treasury sources to newspapers implying that the Government was confronting a major gap in the public finances, with estimates ranging from £20bn to £30bn.

Figures close to Reeves had cited this supposed deficit to defend plans for a sweeping tax increase.

But in a letter to the Treasury committee, Mr Hughes stated that Reeves had “at no point” faced a shortfall exceeding £2.5bn.

He also confirmed on October 31, the OBR had upgraded its projections and informed Ms Reeves that she actually had a £4.2bn surplus - even after a considerable downgrade to productivity.

Yet a mere four days later, Reeves held a press conference at which she made the case for tax rises and suggested that the watchdog’s forecasts were worse than expected.

She strongly suggested that she would be forced to break Labour’s manifesto pledge and raise income tax to plug the hole in Britain's finances and stimulate growth.

Mr Hughes claimed that he told Reeves about the downgrade as early as August 7 – months before speculation began about an income tax raid – and then it was not changed again.

“We did not revisit that 0.3 percentage point reduction at any subsequent point in the forecast process,” Mr Hughes wrote in an open letter to Dame Meg Hillier, the committee chairman.

He added: “At no point in our pre-measures forecast process were either of the Government’s fiscal targets missed by more than £2.5bn.”

Tax levels will rise to their highest in modern history, and Ms Reeves indicated that further increases may be necessary. In response, the Office for Budget Responsibility lowered its growth forecast for next year from 1.9 per cent to 1.4 per cent, predicting growth of only 1.5 per cent by 2029.

Tory shadow chancellor Mel Stride said keeping the cap was the "responsible" thing to do, describing Ms Reeves' autumn statement as a "Budget for welfare, not work."

The change means families, from April 2026, can receive the child element of UC for all children regardless of family size.The OBR said it will lead to an estimated 560,000 families seeing an increase in their UC award averaging £5,310 per year.

Emma McClarkin, the chief executive of the British Beer and Pub Association, said: “We were promised real rates reform but we got a budget of smoke and mirrors. This is really dark for pubs.”

Alison Garnham, chief executive, Child Poverty Action Group, said the decision "will strengthen our nation" while chief executive of the Children's Society, Mark Russell, hailed a "game-changing moment for children".

Dan Paskins, executive director of UK impact at Save the Children UK, said: "The Government is right to recognise that children have paid the price of a poorly thought-out policy for far too long.

"We warmly welcome this momentous change and the leadership that the Prime Minister and Chancellor are showing."