Spending cuts risk ‘doom loop’, ex-Bank of England economist warns
Andy Haldane warned cutting government spending would be harmful for the UK’s longer term fiscal position, because it would weigh on growth.
The Chancellor will receive fresh economic forecasts from the Office for Budget Responsibility (OBR) in March which will take into account sluggish growth since the Budget and higher government borrowing costs.
These forecasts could force Rachel Reeves to hike taxes or cut spending in order to meet her key fiscal rule, which ensures that day-to-day spending is met by tax receipts.
But speaking to Sky News, the former chief economist at the Bank of England said Reeves should be wary about backing additional spending cuts.
“It would be deeply counterproductive to both growth and to the fiscal position if that (the forecasts) led to a cutting back on investment and indeed in spending more generally,” he said.
“Then I think you really are into a doom loop between debt and growth. And that’s a situation to avoid at all costs.”
The government has promised to deliver “ruthless” spending cuts in the spending review, which will determine the scope of departmental budgets for the rest of the decade.
Responding to disappointing public finances figures released this morning, Darren Jones, chief secretary to the Treasury, said that the Treasury will “interrogate every line of government spending” and “root out waste” in the system.
Haldane also suggested that the “doom and gloom” surrounding the economy was “slightly overdone”.
Figures suggest the economy was stagnant in the second half of 2024, while business confidence remains depressed, but Haldane predicted things would improve over the course of the year.
“I think once we get to the second half of the year, the underlying fiscal picture may look somewhat better, as might the underlying growth picture. So anything precipitating now, I think, is best avoided,” he said.
Haldane said the government had made “mistakes” both in the execution and communication of its maiden Budget, which had contributed to the steep decline in corporate confidence.
“I would have found a way of communicating that budget in terms that could help businesses see that if not now, then tomorrow, this was a pro-business budget and that wasn’t done and that led to the further breakdown in business confidence,” he said.