In recent days, rising interest rates
have sparked considerable speculation that the resulting increase
in government spending on debt interest will put the government
on track to miss its fiscal rules, and that remedial action may
be required in the Spring Statement. This is far from guaranteed:
whether or not the fiscal rules are met is likely to be on a
knife's edge, and the Chancellor could get lucky. But if she
doesn't, and the Spring forecasts suggest she's on track to miss
her ‘stability rule' (which requires all day-to-day spending to
be met from revenues), what are her
options?
She could use the Spring Statement to
tweak her fiscal rule, and have it apply as a range (a change
that is already set to come into effect from 2026–27), leaving
any corrective action for the autumn. She could pare back the
generosity of her spending plans. She could break her commitment
to hold one proper fiscal event per year, and use the March
Spring Statement to announce more tax rises (perhaps to kick in
from 2028–29 only if conditions fail to improve). Or, she could
do nothing and miss her fiscal rule. In this IFS Comment, we
explain how we've got here and consider each of these
options.
Ben Zaranko, Associate
Director at the IFS, said:
“As it stands, the Chancellor could
face a rather unenviable set of options. This unfortunate
predicament is largely the consequence of a difficult fiscal
inheritance and global economic factors. But it also reflects a
series of government choices and mutually incompatible promises:
to stick to a hard, numerical fiscal rule while leaving only the
finest of margins against it; to prioritise public services and
avoid imposing another round of austerity; not to raise the
biggest taxes, and not to raise taxes again after the Autumn
Budget; and to hold only one fiscal event per year. If higher
interest rates wipe out her so called 'headroom', something will
have to give.”
Read the full briefing
here
