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Rachel Reeves stood at Labour’s 2025 conference telling the country what it supposedly “cannot afford”.

She claimed she cannot lift the cruel two-child benefit cap because her fiscal rules forbid it.

But this is economically illiterate, because the evidence shows abolishing the cap would strengthen, not weaken, the public finances.

And this is the central problem with Labour’s economic stance: Reeves is hiding behind “independent” institutions and “orthodox” rules that are presented as neutral but in reality entrench political choices.

If austerity-era mistakes taught us anything, it is that the Office for Budget Responsibility’s (OBR) predictions, the Bank of England’s interest rate decisions and the Treasury’s fiscal rules are only as good as the assumptions baked into them.

And those assumptions routinely undervalue the benefits of investment in people.

The OBR and the myth of independence

Professor Simon Wren-Lewis, in his latest Mainly Macro column, is right to say that institutions like the OBR and the Bank of England are better left independent of day-to-day political meddling.

Nobody wants ministers setting interest rates for short-term electoral gain. But independence does not equal infallibility.

In the Coalition years, the OBR produced hopelessly optimistic forecasts that austerity would spur a rapid recovery. They never came true.

The damage done – to jobs, to wages, to public services – was immense. Independence did not stop mistakes; it only made them harder to challenge in real time.

Today, the same pattern repeats – although possibly with different spokespeople. Forecasts and rules may act as a straightjacket on government policy, not because they are objective, but because they are built on “orthodox” assumptions that treat social investment as pure cost rather than potential gain.

The fiscal rule straitjacket

Labour has signed up to a fiscal rule that requires current revenue spending to be covered entirely by taxation by 2029-30.

That’s an ideological decision, that excludes the possibility that some current spending might actually generate growth and improve the public finances over the same horizon.

It’s a political choice masquerading as technical necessity.

Reeves is using it as a shield against policies she does not want to pursue.

The two-child cap: a case study in bad economics

Nowhere is this clearer than in her stance on the two-child benefit cap.

At conference, Reeves actively resisted calls to scrap it, claiming the nation “cannot afford” such generosity in the current climate.

But my own analysis shows the opposite. Abolishing the two-child cap would pay for itself by 2029-30 – and then some.

How? Because families on low incomes spend every extra pound they receive. That boosts demand, stimulates growth, increases tax receipts and reduces some of the social costs linked to child poverty. By 2029-30 the Treasury would be better off, not worse off, from lifting the cap.

So when Reeves says “we can’t afford it”, she is not only hiding behind her rules; she is hiding from the facts.

What this means for the OBR and the Bank

The case study tells us something profound about our institutions: The OBR and the Bank of England may be independent, but they are not neutral.

Their models embody orthodox choices: discounting the value of social investment; ignoring longer-term savings from poverty reduction; privileging “fiscal credibility” over real-world outcomes.

(What I mean is: they haven’t considered the economic benefits of possible decisions like ending the two-child benefit cap in their forecasts.)

As a result, governments are nudged towards austere policies even when the economics points the other way.

It’s not that Reeves cannot lift the cap; it’s that her chosen rules and the assumptions she accepts make it look impossible.

Independence here does not mean protection from bad politics – it means embedding bad economics so deeply it becomes undetectable.

Lessons from the Coalition’s mistakes

We have seen this before: after it was established in 2010, the OBR dutifully assumed that slashing public spending would trigger business investment and growth – as Tory and Liberal Democrat ministers had claimed.

Ministers then used those forecasts as political cover for their decisions, which were to slash public spending.

Reality showed otherwise: the recovery lagged, inequality grew, and the fiscal position worsened.

Today Reeves is repeating that error – not by cutting further, but by refusing to invest in the nation’s children when the returns are obvious.

If the OBR and the Treasury can’t or won’t recognise that, then they are not serving democracy but constraining it.

Independent does not mean indisputable

For clarity: nobody is arguing to scrap the OBR or end Bank of England independence.

We do need institutions that stop ministers playing politics with interest rates or forecasts.

But independence must never mean immunity from scrutiny.

If the OBR or the Treasury’s rules are producing blind spots – if they are treating life-saving, poverty-reducing policies as unaffordable when they actually strengthen the economy – then those blind spots must be exposed and challenged.

Rachel Reeves had a choice at Labour’s conference. She could have shown courage, scrapping a cruel and counterproductive policy and trusting the evidence that it would improve lives and the public finances.

Instead, she hid behind her rules and repeated the tired mantra of “we can’t afford it”.

We can.

Will she have the political will to do what is right – or will Labour’s economic stance be remembered as a self-inflicted wound dressed up as responsibility?

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