Reeves is warned her ‘dysfunctional’ policy on fiscal rules is causing UK’s economic uncertainty
Rachel Reeves should scrap her self-imposed rules on debt and borrowing to stop the “dysfunctional” policymaking behind Britain’s economic uncertainty, the Institute for Fiscal Studies (IFS) has said.
In a major blow to the Chancellor, the think tank said the current system “fails purpose” and that Reeves’ determination to stick to fiscal limits, which prevent him from borrowing to pay for day-to-day expenses and require debt to fall as a percentage of GDP by 2029/30, means he cannot keep his promise to deliver sustainable public finances.
In a scathing assessment of his strategy, economists likened his approach to a driver staring at the speedometer “ignoring whether the brakes are working.”
The IFS said policies affecting millions of Britons were too easily influenced by “volatility” in economic forecasts, contributing to wider financial uncertainty and leading to long-term challenges being overlooked.
The warning comes despite Wednesday’s news of a surprise fall in inflation and less than two weeks before the Chancellor is due to give his spring statement with the latest forecasts for the UK economy.
Labor has so far failed to achieve the growth that Mrs Reeves and Sir Keir Starmer promised when Labor came to power. The economy came to a near standstill at the end of last year after November’s budget uncertainty increased by just 0.1 percent in the last three months. Figures released on Tuesday showed that the unemployment rate has reached its highest level in five years.
The Chancellor came under fire when he dramatically abandoned plans to raise income tax at the eleventh hour in last year’s Budget, days after apparently signaling the move was necessary to comply with his fiscal rules.
The IFS said looking at a broader range of indicators of how the economy is performing would reduce the incentive for governments to “twist policies” to meet the rules.
The think tank also warned that the credibility of fiscal rules imposed by successive chancellors, including Ms Reeves, to reassure financial markets about Britain’s economic plans had been undermined by “aggressive ‘gaming’ on changing targets”.
Ms Reeves has always said her financial rules are “non-negotiable”, but has been accused in the past of playing the “same stupid games” as her predecessors to balance the figures to suit her own rules.
The IFS said: “This finding [on the amount of headroom against the fiscal rules] It increasingly contributes to a dysfunctional policymaking process. Meanwhile, aggressive ‘play’ of rotating targets and frequent changes to the rules have undermined their credibility. “The framework also fails to deliver on the promise of sustainable public finance.”
The report warned that flexibility in rules means that when forecasts change and policy needs to be readjusted, “fluctuation in forecasts translates into volatility in policy. This results in tax and spending policies being rushed and of poor quality, and increases economic uncertainty.”
IFS deputy director Ben Zaranko said the system was “like getting behind the wheel of a car and judging whether you’re driving safely by looking at the speedometer alone, ignoring traffic conditions, weather and whether the brakes are working.”
IFS director Helen Miller said: “It is important for our future that policies are well designed and public finances are sustainable, but the UK’s current fiscal framework is not working on both fronts.”
Instead, the IFS called for a set of economic indicators based on a set of “fiscal traffic lights” that would be used to monitor economic performance. It was stated that this would allow the government to maintain its credibility, which is very important in the financial markets.
But he warned that the system could not be changed immediately, as reforms should only be made from a position of economic “strength”.
David Aikman, director of the National Institute for Economic and Social Research, said the IFS was right that the current system was too fixated on a single headroom figure, which “encourages gaming and leads to policy change as forecasts change”.
“The acid test of any reform is whether it provides a credible path to reduce debt over time, while maintaining flexibility to deal with shocks,” he added.
Former Treasury secretary Jim O’Neill, who advised Ms Reeves when she was in opposition, said: Independent: “I think intellectually [the IFS report is] quite loud. IMF [International Monetary Fund] He looks at that kind of thing.”
But he said it was “unlikely” that the government would make such a change anytime soon. “Hopefully, and somewhat more likely, they’ll start using the second fiscal rule: borrowing to invest more. That’s what I believe they should do, too.”
In October 2024, the then director of the IFS, Paul Johnson, said that year’s Budget “resembled the same stupid games we got used to in the last batch” and accused the chancellor of choosing to “pencil incredibly low spending increases into the future to ensure fiscal arithmetic balance”.
A Treasury spokesman said: “The government’s non-negotiable fiscal rules help keep interest rates low while also prioritizing investment to support long-term growth.
“We have doubled fiscal headroom in the budget and are reducing borrowing more than any other G7 country; borrowing as a proportion of GDP is expected to be at its lowest level in six years.”
