Chancellor could have to break one annual fiscal event commitment – experts

Rachel Reeves could have to break her commitment to only one major economic event per year, experts have suggested ahead of this month’s Spring Statement.

Dr Isabel Stockton, a senior research economist at the Institute for Fiscal Studies (IFS), suggested that when faced with the options of breaking her self-imposed financial rules or keeping to the promise of only one fiscal event per year, “it seems likely that her commitment to a single fiscal event is the one that is likely to go”.

The Chancellor will deliver a statement on March 26 in response to the latest forecast from the budget watchdog.

Increased borrowing costs and weak economic growth are likely to require spending cuts in order to meet her commitments on managing the public finances.

At a webinar looking ahead to the Office for Budget Responsibility’s (OBR) forecast, Dr Stockton said the fact the rules were going to be hit “by a wafer thin margin” meant it was “always going to make this commitment to only one major fiscal event a year difficult to stick to”.

Paul Johnson, the director of the IFS, described Ms Reeves’s desire for a single fiscal event as commendable, but suggested the Spring Statement “may well turn into more of a fiscal event than the Chancellor would like, because it seems more than likely that the OBR will be downgrading their expectations for fiscal outcomes in a way which will mean that both the letter and the spirit of Rachel Reeves’s fiscal rules will be missed, and therefore she’ll be forced to do something”.

The Chancellor has set two self-imposed rules as she seeks to stabilise the public finances. The first is that day to day spending must be paid for by revenue, not borrowing. The second is that debt should be falling as a share of national income by 2028/29.

If the numbers from the OBR indicate she is “just about” missing the fiscal target, people could argue not a lot might have changed in the public picture, but Dr Stockton thinks it is unlikely that Ms Reeves will take this approach.

“She may be concerned about the signal that would be sent to markets in particular, of perhaps a lack of fiscal credibility if she breaches her fiscal rules at the first time of asking.”

The statement is expected just weeks after Sir Keir Starmer announced the Government would increase defence spending to reach 2.5% of GDP by 2027, with a target of upping that further to 3% in the next parliament.

Ministers have emphasised the Government’s commitment to national security, but Mr Johnson predicted it would be higher taxes which help cover it.

With cuts unlikely in other large governmental spending areas such as health, pensions and education, Mr Johnson said: “It’s going to be tough to find the additional money for defence unless you’re looking at taxes.”

It comes after the thinktank published a report which suggested the “pass-fail” nature of the fiscal rules leave the country’s economic policy “entirely exposed” to global challenges.

In a report published on Thursday, the IFS said: “In an uncertain and volatile world, aiming to meet pass–fail fiscal rules with close to zero headroom leaves fiscal policy entirely exposed to global economic developments (or, more accurately, what the OBR judges the impact of those economic developments might be) and puts the Chancellor’s (sensible) promise to make fiscal policy changes only once a year at risk.”

One economist suggested some of the issues the Chancellor is now facing could in part be down to the Government’s approach shortly after the election.

Simon French, the chief economist at Panmure Liberum, asked whether a more “Cool Britannia” approach akin to the last time Labour were in Government would have helped.

Asked if things got worse because of what the Government has done or if it is all driven by international factors, Mr French said he thought it was an 80/20 split – with the larger portion attributed to aspects that are out of the Government’s control.

But of the 20%, he said there was a deterioration in consumer confidence from August through to around October, when he said there “was a very negative tone around the inheritance, the black hole, the broadest shoulders, that rose garden speech from Prime Minister”.

He added: “I think the damage to sentiment there is that 20% element that has made things harder for the Chancellor than it would have been, had they perhaps… channelled some of the sort of Cool Britannia of ’97 the last time they came to power.”