IFS: Reeves tweaking debt rule won’t change fiscal fundamentals
Rachel Reeves refused to rule out changing the debt rule which constrains tax and spend decisions, but a leading think tank pointed out technical changes would not alter the fundamentals.
The Chancellor has inherited a very difficult fiscal position, with many public services in need of funding boosts while both the tax burden and national debt stand at their highest level for many decades.
But many economists argue the Chancellor could free up some space for spending increases by tweaking the key fiscal rule, which requires debt to be falling in five years time.
One option is to broaden the definition of debt to include debt held by the Bank of England. By making this change, Reeves could increase her space for manoeuvre by £16bn, according to the Institute for Fiscal Studies (IFS).
Another option is to exclude losses from the Bank’s quantitative easing (QE) programme, which JP Morgan calculates would free up an extra £17bn.
Given the dire state of many public services, as well as her pledge to not increase any of the main taxes, a change to the debt rule might be the least politically painful option.
During her trip to New York, the Chancellor did not rule out a change to the existing debt definition. “We’ll publish the precise details of the fiscal rules in the Budget,” she said.
But Ben Zaranko, a senior research economist at the IFS, argued that any minor changes to the existing fiscal rule would deflect from more fundamental debates.
“If the government wants to borrow and invest more, there is a coherent and principled case to be made for doing so,” he said.
“Ideally, we would hear that case and debate its merits, rather than get bogged down in technical debt definitions and an unhelpful discussion about so-called fiscal headroom”.
Zaranko also pointed out that changing the debt rule would not change the fact that the government was still borrowing more than it would have done. “Additional borrowing is still additional borrowing,” he said.