Government's 'fiscal rules' aren't working and must be reformed, IfG warns

Think tank's proposals would give departments a "minimum" of two years' worth of firm spending plans
Photo: Imageplotter/Alamy Live News

By Jim Dunton

29 Feb 2024

The UK's fiscal framework and the "rules" it works toward have become dominated by "magical thinking" and system-gaming, and are in need of reform, a Whitehall think tank has said.

The Institute for Government predicted that next week's Budget will see chancellor Jeremy Hunt announce that the government is on track to meet the fiscal rules by "worse than fiction" spending plans that will almost certainly have to be revised following the upcoming general election.

Its policy paper Strengthening the UK’s Fiscal Framework –Putting Fiscal Rules in Their Place says that nine out of the past 10 spending reviews have needed to be revised. The paper notes that neither the Conservative government nor the Labour Party has a clear fiscal strategy with just months to go until the next general election, and that both parties are  "committed to fantastical spending plans".

The IfG argues that government departments need more certainty over their long-term funding and the Office for Budget Responsibiity needs the flexibility to assess whether policy is consistent with meeting the government’s overarching fiscal objectives, rather than just the letter of specific rules.

The report's authors – IfG chief economist Gemma Tetlow, deputy chief economist Tim Pope and senior economist Olly Bartrum – say a new system of setting spending plans for five years, and reviewing those plans every three years, should be established.

Fiscal-rules targets would be binding in the third, rather than fifth, year of the forecast. The IfG points out that although the current binding fiscal rule requires that debt be forecast to fall in five years’ time, the government can be compliant with this without debt ever actually falling as a share of GDP.

It notes the situation allows governments to "repeatedly announce short-term ‘temporary’ giveaways accompanied by plans to tighten policy later on that never materialise", an observable phenomenon since 2010.

Report authors Tetlow, Pope and Bartrum also observe that on "several" occasions since 2010, government departments have been left in the dark about their budgets for the next financial year until just a few months before the start of the period.

"Setting multi-year budgets on a predictable, regular basis would increase the level of certainty that departments have over their budgets and enable them to spend more efficiently," they say. "A regular rhythm, rather than a timeline dictated by the Treasury, would also help other departments to prepare their submissions for spending reviews with a longer lead time.

"Fundamentally for the health of the fiscal framework, though, the crucial effect will be to ensure that government always has a minimum of two years of firm spending plans set out."

The report acknowledges that although the current system is open to political gaming, abolishing the fiscal rules altogether could potentially make things worse – with fiscal polilcy potentially becoming "less transparent, less well-specified and more subject to change".

Among the report's other calls are a request for the OBR to have greater flexibility in its assessment of both the government’s rules and its performance against them, with a licence to consider progress against fiscal sustainability more broadly. That would allow the OBR to look at whether government policy is consistent with meeting the government’s overarching fiscal objectives, rather than just the wording of the rules.

Tetlow, Pope and Bartrum conclude: "Politicians should not let themselves be governed by a poorly designed fiscal rule – particularly one as flawed as the one currently tying government’s hands.

"It is their responsibility to develop a coherent strategy – consistent with what they want to deliver in government – and this should give rise to their rules. But even the existence of meaningful rules seems to have lost its significance: meeting their letter but not their spirit through trickery and games has become routine."

A Treasury spokesperson said fiscal rules are used in many countries, with Canada and France among nations with commitments to reduce their debt-to-GDP ratio over the medium term.

"Our fiscal rules promote long term growth and stability, and reduce borrowing and debt, so the UK is able to withstand future economic shocks," the spokesperson said.

"Thanks to our responsible action with the public finances, we are on track to meet our fiscal rules, with debt as a share of the economy on track to fall by the end of the OBR’s five year forecast period."

This story was updated at 16:10 on 29 February 2024 to include a response from HM Treasury

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