UK fiscal policy is in a bad equilibrium. One particular issue is
the amount of policy volatility, and that all too often the
Chancellor makes rushed decisions about tax and spending in
response to relatively small movements in the Office for Budget
Responsibility (OBR)'s central forecast. This is ultimately a
result of the government's decision to have a numerical,
pass-fail fiscal rule and then aim to meet it almost exactly. But
there have also been suggestions that part of the problem is the
fact that the OBR produces an economic and fiscal forecast
(including an assessment of the government's performance against
its fiscal rules) twice each year.
The policy volatility problem is a real one. There is merit to
the arguments for downgrading the importance of fiscal forecasts
that happen outside of the Budget. But from our current starting
point, there is no unambiguously ‘right' option available.
Our view is that, on balance, there are strong arguments
for retaining the longstanding practice of having two forecasts
per year, and that alternative means of mitigating the (very
real) policy volatility problem are preferable.
In particular, one option would be to bring forward and slightly
adjust a change that is already legislated to come into effect
from spring 2027. This would see the target for current budget
balance expressed as a range, so that a current budget deficit of
up to 0.5% of GDP would not count as a breach. As well as
bringing it forward to apply immediately, the Chancellor might
sensibly tweak the framework so that the range only applies
between fiscal events (i.e. at the spring forecast) rather than
at the once-a-year autumn Budget, where there's a risk that the
bottom of the range becomes the new target.
This would be a sensible technical change, but one that would
need to be communicated extremely carefully in such a delicate
environment, with gilt yields high and volatile. It would be
important to emphasise that such changes would be designed to
reduce unnecessary policy volatility, and not as an attempt to
relax the government's fiscal constraints.
Ben Zaranko, Associate Director at the IFS,
said:
“The UK fiscal debate is overly fixated on the narrow concept of
‘fiscal headroom' against constantly moving forecasts, and we
need to find a way to reduce the constant policy tinkering that
results. Some have suggested that to reduce opportunities for
policy tinkering, we should have one official economic and fiscal
forecast each year, rather than two. While this would help to
address the (very real) policy volatility problem, it would have
downsides – most obviously a major reduction in fiscal
transparency.
The Treasury already has a sensible solution to the question of
how to handle forecasts produced between fiscal events: to treat
the borrowing target as a range at the spring forecast. The
problem is that this change isn't set to come into effect until
the spring of 2027. Rather than scrapping the second forecast, a
better option might be to bring forward this change – if it can
be communicated clearly and carefully.”
ENDS
Notes to Editor
How frequently should the OBR produce forecasts? is an
IFS briefing Carl Emmerson, Helen Miller and Ben Zaranko.
The briefing is
available to read here on the IFS website
