Should Reeves Rethink Borrowing Rules? Insights from IFS

The Institute for Fiscal Studies (IFS) has expressed concerns that Chancellor Rachel Reeves is overly focused on rigid borrowing rules, which they argue are leading to ineffective policymaking in the UK. The think tank advocates for a shift away from the current fiscal framework, suggesting a new system that would provide a more nuanced view of fiscal health rather than a simplistic pass-fail model based on borrowing thresholds.

Last updated: 27 October 2023 (BST)

What’s happening now

Chancellor Rachel Reeves has adopted a set of fiscal rules that fundamentally guide the UK government's approach to borrowing and spending. However, the IFS contends that this approach is not only outdated but also detrimental to effective policymaking. As the UK faces ongoing economic challenges, the IFS is calling for a comprehensive reassessment of the current fiscal framework, which they believe has failed to deliver sustainable public finances.

Key takeaways

The IFS criticises the current borrowing rules as overly simplistic and damaging to policymaking.
There is a call for a new fiscal framework that uses a 'traffic light' system to evaluate economic health.
The IFS argues that the existing framework is not achieving sustainable public finances.

Timeline: how we got here

Since the Labour government came to power, chancellors have set fiscal rules that determine borrowing limits and government expenditure. The latest developments include:

27 October 2023: IFS reports concerns over Chancellor Rachel Reeves' fiscal rules.
September 2023: The Office for Budget Responsibility forecasts a £22 billion headroom against borrowing rules in five years, up from £9.9 billion.
June 2023: Rachel Reeves outlines fiscal rules upon taking office.

What’s new vs what’s known

New today/this week

The IFS has released a report arguing for a fundamental shift in the way the UK assesses its fiscal health. Instead of adhering to strict borrowing limits, they suggest using a 'traffic light' system to provide a more comprehensive view of the fiscal landscape.

What was already established

The current fiscal rules, introduced by Chancellor Rachel Reeves, focus on maintaining borrowing below certain thresholds. However, critics, including the IFS, argue that this method has led to "dysfunctional policymaking" as governments strive to meet these arbitrary targets.

Impact for the UK

Consumers and households

For UK consumers, the implications of the current fiscal framework could lead to tighter budgets, as borrowing limits may restrict government spending on essential services and social support. This could affect public services, welfare, and even household taxes.

Businesses and jobs

Businesses may face uncertainty as government policies shift in response to the constraints of current borrowing rules. The pressure to meet fiscal targets could hinder investment in job creation and infrastructure, negatively impacting economic growth.

Policy and regulation

The IFS’s call for a new framework may prompt discussions within the UK government regarding future fiscal policies and regulations. The Treasury's current stance is that maintaining fiscal discipline is crucial for keeping interest rates low, but a shift toward a more flexible framework could alter this narrative.

Numbers that matter

£22 billion: The projected headroom against borrowing rules in five years, according to the Office for Budget Responsibility.
£9.9 billion: Previous forecast for the headroom, indicating a significant increase.
6 years: The timeframe in which borrowing is expected to be the lowest as a share of GDP, according to the Treasury.

Definitions and jargon buster

Fiscal rules: Guidelines set by the government to manage public finances, including borrowing and spending limits.
Headroom: The amount of borrowing capacity available to the government without breaching fiscal rules.
Traffic light system: A proposed framework for assessing fiscal health, using colours (red, yellow, green) to signify performance against set objectives.

How to think about the next steps

Near term (0–4 weeks)

In the immediate future, discussions around fiscal policy frameworks are likely to intensify as the government faces pressures from economic challenges and the upcoming general election.

Medium term (1–6 months)

As the IFS report gains traction, there may be moves towards revising the fiscal rules set by Chancellor Reeves, potentially paving the way for a more flexible economic strategy that aligns with broader objectives.

Signals to watch

Government announcements regarding fiscal policy changes or reviews.
Debates in Parliament about public finance management.
Reports from the Office for Budget Responsibility on economic forecasts and borrowing headroom.

Practical guidance

Do

Stay informed about changes to fiscal policies that may affect personal finances and business operations.
Engage with public discussions or consultations regarding fiscal management strategies.

Don’t

Ignore the potential implications of fiscal policy changes on economic stability.
Assume that current borrowing rules will remain unchanged without scrutiny.

Checklist

Review your household budget in light of potential changes to government spending.
Monitor economic forecasts from credible sources.
Engage with community discussions on fiscal policies.
Consider how changes in government policy may affect your business sector.

Risks, caveats, and uncertainties

While the IFS raises valid points about the rigid nature of the current fiscal framework, there are risks associated with changing these rules. Uncertainty about the economic landscape could lead to volatility in public finances. Additionally, political resistance to altering fiscal rules may arise, particularly from those who adhere to traditional fiscal discipline.

Bottom line

The ongoing debate about the UK’s fiscal rules highlights the need for a more flexible and transparent approach to public finances. As the government navigates economic challenges, it is crucial to consider how these frameworks can better serve the economy and society. Keeping informed about these changes can help individuals and businesses prepare for potential impacts.

FAQs

What are the current fiscal rules in the UK?

The current fiscal rules set borrowing limits for the government, determining how much it can spend and invest in public services.

How might a 'traffic light' system improve fiscal management?

A 'traffic light' system would provide a more nuanced view of fiscal health, allowing for better assessment of the government's overall financial position without strict thresholds.

What are the implications of changing fiscal rules?

Changing fiscal rules could lead to more flexible government spending, potentially enhancing investment in public services and economic growth, but may also introduce uncertainties in public finances.