Rachel Reeves should tweak fiscal rules to ease pressure, IFS says
Chancellor Rachel Reeves should bring forward a change to fiscal rules to ease pressures faced at spring fiscal events, a leading economics think tank has urged.
In a new briefing on public finances, the Institute for Fiscal Studies (IFS) said Rachel Reeves should refrain from changing the number of times the Office for Budget Responsibility (OBR), the fiscal watchdog, produces a central forecast and instead make a slight adjustment to rules that offers her greater flexibility in spring fiscal events.
Its recommendation would allow the chancellor to deliver a budget deficit of 0.5 per cent of GDP for the end of the period written into Reeves’ fiscal rules.
The allowance of a deficit would only apply at every spring forecast drawn up by the OBR, researchers said.
Ben Zaranko, associate director at the IFS, said the fixation on the “narrow concept” of fiscal headrooms gave way to justification for rules to be tweaked to stop “constant policy tinkering”.
Zaranko said IMF-led calls for the OBR to publish just one central forecast a year rather than two would reduce transparency and lead to other downsides though it may prevent excessive “policy volatility”.
“The Treasury already has a sensible solution to the question of how to handle forecasts produced between fiscal events: to treat the borrowing target as a range at the spring forecast,” he said.
“The problem is that this change isn’t set to come into effect until the spring of 2027.
“Rather than scrapping the second forecast, a better option might be to bring forward this change if it can be communicated clearly and carefully.”
Calls for Rachel Reeves to revise rules
Rachel Reeves’ “non-negotiable” rules that limit borrowing rely heavily on forecasts set by the OBR.
The first rule states the public budget must be balanced or in surplus by 2029/30 or on a three-year rolling period.
The current budget range between a 0.5 per cent deficit and 0.5 per cent surplus will come as a shift from the current set of rules when there will be a three-year rolling target on day-to-day spending.
The second rule states net financial debt should fall as a share of UK GDP after a rolling three-year period.
At this year’s Spring Statement, Labour backbenchers and opposition figures blamed £5bn welfare cuts – which have since been ditched – on Reeves’ insistence to stick by her fiscal rules.
OBR chiefs said they were told about the cuts at late notice, preventing economists from analysing the potential benefits of welfare reforms to economic growth and the state of public finances from being considered.
Despite suggested changes to fiscal rules, Reeves is under pressure to fill a black hole of up to £30bn at this year’s Budget due to high borrowing costs, an expected growth downgrade and U-turns on key spending policies.