As the UK Budget approaches – less than two weeks to go until the 30 October! – we are launching a series of preview articles looking at some of the considerations for the Chancellor, as well as how the Budget process itself works and how some of the measures being floated might affect the economy.
This series of longer-form articles will be published over the next 10 days as the Budget approaches, allowing readers to go beyond the usual short-form articles they might be finding elsewhere and aiming at providing a more in-depth understanding of what the implications of these decisions are, why they might be reading about them elsewhere, how they came to be – and how that might be changed. The whole series can be accessed here, where you will also find additional Budget coverage.
Our first article focuses on fiscal rules: why we have them, how they came to be designed the way they are, and how some of the poor incentives they have built into them might be alleviated. We talk through the reasons why came into fashion – essentially trying to guard against incentives for excessive deficits – and their history since they were first codified in 1997.
One of the main takeaways from the article is the extent to which the Treasury has become fixated on meeting these fiscal rules, almost to the detriment of more sensible policy. Of course there is no actual penalty that comes automatically with missing them – but the loss of face and political embarrassment of having an independent institution assessing them as not being met has meant Governments go to great lengths to avoid missing them. The 2022 Autumn Statement was a perfect example of these poor incentives having real world consequences, with 0.7% real terms cuts to unprotected departments with no particular economic justification. One might argue the cost of avoiding political embarrassment was £30 billion a year of public spending cuts (£19 billion in day-to-day spending and £12 billion in capital spending).
The obsession of the Treasury with meeting these fiscal targets has combined with its increasing ability in the Budget timetable to ‘fine-tune’ policy and often end up deciding policy through figures of headroom rather than on their merits, on the basis of spurious accuracy five years down the line. Instead, a way forward that would incentivise better policymaking would be to reduce the scope for tinkering with policy towards the end of the forecast by reducing the amount of opportunities the Treasury has to trial the economic effects of their package, as well as moving to a broader set of metrics for the OBR to formally assess the sustainability of fiscal policy. Doing so would make it harder for the Government to try and achieve a particular metric of headroom to the detriment of others.
You can find the full article here – and we’ll be publishing another article in the next couple of days on the potential effect of the mooted employer National Insurance Contributions rate increase.
Authors
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.