UK Economic Policy Under Scrutiny as 'Pass-Fail' Fiscal Rules Expose Vulnerabilities
Chancellor Rachel Reeves faces potential cuts amid forecasts of rising borrowing costs and global economic challenges.
The United Kingdom's economic policy framework is facing increasing scrutiny due to self-imposed 'pass-fail' fiscal rules set by Chancellor Rachel Reeves, which some economists claim leave fiscal policy vulnerable to global economic fluctuations.
According to the Institute for Fiscal Studies (IFS), these rules may lead to significant financial adjustments as external pressures mount.
Chancellor Reeves has established two principal fiscal rules: day-to-day government spending must be financed through revenue rather than borrowing, and public debt must decline as a percentage of national income by the fiscal year 2028/29. However, the impending forecast from the Office for Budget Responsibility (OBR) is expected to reflect higher borrowing costs and sluggish growth projections for the UK, influenced by global economic dynamics, including trade policies enacted during Donald Trump’s presidency.
Recent IFS assessments indicate that while government expenditure aligns with prior indications from October, borrowing projections for 2024-25 might exceed expectations by £16 billion, totaling £143 billion, which is £56 billion higher than last spring's estimates.
This discrepancy primarily stems from a £50 billion upward revision in planned spending announced last autumn.
Economists from the IFS suggest that should Chancellor Reeves' fiscal rules appear at risk of being breached, it is likely that she would adjust tax or spending plans sooner than the scheduled autumn budget.
Failure to meet her fiscal targets initially could undermine her credibility in financial markets and provoke political scrutiny regarding future fiscal policies, including tax increases.
The IFS report stated that despite the lack of an ideal fiscal framework, improvements could be considered given the volatility of the global economic landscape.
Meeting strict fiscal targets with minimal flexibility, especially in an unstable environment, subjects UK fiscal policy to precarious external conditions, which could necessitate frequent reassessments rather than a stable, annual fiscal approach.
Chancellor Reeves is anticipated to announce substantial cuts to public spending in her upcoming Spring Statement on March 26, as the government embarks on a plan to stabilize fiscal resources.
Preliminary forecasts suggest that the OBR is revising growth predictions downward and that the government's borrowing costs have been impacted by market volatility observed in January.
Measures proposed to streamline government spending include restraining welfare expenditures and pursuing efficiency improvements across various departments.
The government is reportedly eyeing savings of approximately £5 billion through adjustments in work requirements and modifications to the generosity of certain welfare payments, a strategy the IFS indicates could be beneficial for fiscal equilibrium.
However, the Resolution Foundation has warned against potential reforms that restrict eligibility for incapacity or disability benefits, cautioning that such changes could disproportionately affect a limited group of claimants.
It has suggested that reforms should aim to reduce discrepancies between various forms of out-of-work support to better support beneficiaries.
Emphasis on managing spending in key areas, such as entry points into the welfare system and criteria for benefit entitlements, is viewed as crucial for curbing the benefits expenditure projected to increase by £32 billion throughout the 2020s.
Louise Murphy, a senior economist at the Resolution Foundation, stated that while immediate welfare savings are a priority for the government ahead of March 26, implementing substantial reforms that achieve long-term benefits will require time and careful consideration.
In parallel, the Liberal Democrats have urged the Chancellor to exempt the health and social care sector from the impending rise in employer national insurance contributions scheduled for April 6, particularly emphasizing that while the government has pledged to cover the increased costs for the NHS, similar support for private care providers such as care homes and dental practices remains unaddressed.
According to the Institute for Fiscal Studies (IFS), these rules may lead to significant financial adjustments as external pressures mount.
Chancellor Reeves has established two principal fiscal rules: day-to-day government spending must be financed through revenue rather than borrowing, and public debt must decline as a percentage of national income by the fiscal year 2028/29. However, the impending forecast from the Office for Budget Responsibility (OBR) is expected to reflect higher borrowing costs and sluggish growth projections for the UK, influenced by global economic dynamics, including trade policies enacted during Donald Trump’s presidency.
Recent IFS assessments indicate that while government expenditure aligns with prior indications from October, borrowing projections for 2024-25 might exceed expectations by £16 billion, totaling £143 billion, which is £56 billion higher than last spring's estimates.
This discrepancy primarily stems from a £50 billion upward revision in planned spending announced last autumn.
Economists from the IFS suggest that should Chancellor Reeves' fiscal rules appear at risk of being breached, it is likely that she would adjust tax or spending plans sooner than the scheduled autumn budget.
Failure to meet her fiscal targets initially could undermine her credibility in financial markets and provoke political scrutiny regarding future fiscal policies, including tax increases.
The IFS report stated that despite the lack of an ideal fiscal framework, improvements could be considered given the volatility of the global economic landscape.
Meeting strict fiscal targets with minimal flexibility, especially in an unstable environment, subjects UK fiscal policy to precarious external conditions, which could necessitate frequent reassessments rather than a stable, annual fiscal approach.
Chancellor Reeves is anticipated to announce substantial cuts to public spending in her upcoming Spring Statement on March 26, as the government embarks on a plan to stabilize fiscal resources.
Preliminary forecasts suggest that the OBR is revising growth predictions downward and that the government's borrowing costs have been impacted by market volatility observed in January.
Measures proposed to streamline government spending include restraining welfare expenditures and pursuing efficiency improvements across various departments.
The government is reportedly eyeing savings of approximately £5 billion through adjustments in work requirements and modifications to the generosity of certain welfare payments, a strategy the IFS indicates could be beneficial for fiscal equilibrium.
However, the Resolution Foundation has warned against potential reforms that restrict eligibility for incapacity or disability benefits, cautioning that such changes could disproportionately affect a limited group of claimants.
It has suggested that reforms should aim to reduce discrepancies between various forms of out-of-work support to better support beneficiaries.
Emphasis on managing spending in key areas, such as entry points into the welfare system and criteria for benefit entitlements, is viewed as crucial for curbing the benefits expenditure projected to increase by £32 billion throughout the 2020s.
Louise Murphy, a senior economist at the Resolution Foundation, stated that while immediate welfare savings are a priority for the government ahead of March 26, implementing substantial reforms that achieve long-term benefits will require time and careful consideration.
In parallel, the Liberal Democrats have urged the Chancellor to exempt the health and social care sector from the impending rise in employer national insurance contributions scheduled for April 6, particularly emphasizing that while the government has pledged to cover the increased costs for the NHS, similar support for private care providers such as care homes and dental practices remains unaddressed.
