On 26 March, will respond to updated
economic and fiscal forecasts from the Office for Budget
Responsibility (OBR). One key question is whether those forecasts
put the Chancellor on track to miss her fiscal rules. This is by
no means guaranteed. There are a huge number of moving parts,
recent economic data paint a mixed picture, and much will depend
on the OBR's judgements about future economic developments. The
Chancellor may yet get lucky. But she may not.
A relatively minor downgrade in the OBR's forecast could
force the Chancellor to choose between policy stability and her
commitment to a single fiscal event per year, on the one hand,
and her fiscal rules on the other. This prospect is
largely a result of the Chancellor's own earlier decisions – and
in particular her decision to leave only the finest of margins
against her fiscal rules.
The case for acting now to meet the fiscal rules is not
unambiguous. The constant fine-tuning and tweaking of
policy brings costs. There is no meaningful economic difference
between a forecast for a small current budget surplus in 2029–30
and a forecast for a small current budget deficit in 2029–30. The
announcement of any policy changes could be delayed to the full
fiscal event in the autumn. But the Chancellor might
worry about the message it would send to financial markets if she
were to breach her ‘non-negotiable' fiscal rules at the first
time of asking, and may wish to act before June's
multi-year Spending Review sets out departmental budgets for the
rest of this parliament. Moreover, if she does nothing now,
promising action in the autumn, that would almost certainly lead
to months of damaging speculation over what taxes will be
increased in the Budget.
If she does opt for fiscal action, it could take the form of tax
rises, spending cuts, or both. Given the forward-looking nature
of the fiscal rules, promises to raise taxes or cut spending some
years into the future would be enough to meet the letter, if not
the spirit, of those rules.
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Extending the freezes to various personal tax
thresholds by an additional two years (2028–29 and 2029–30)
could raise around £10 billion in 2029–30. A further
threshold freeze would be a stealthy and arbitrary means of
raising revenue, but it is – not unrelatedly – a tax rise that
recent governments have proved willing and able to implement,
and so may be judged as credible. Other tax rises are of course
possible.
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The Chancellor could reduce the generosity of plans for
public service spending – reducing the size of the
pot, before it is allocated to individual departments in June.
Reducing the planned cash level of day-to-day spending in
2029–30 by around £10 billion would, under the October 2024
inflation forecast, reduce the average real-terms growth rate
to around 0.9% per year (down from 1.3%). She may not even have
to change the cash numbers she has pencilled in: she could
allow higher inflation to erode the real-terms generosity of
the plans she published in the autumn. That would make what
already looks like a difficult Spending Review even more
challenging. Reducing planned increases in public service
spending even further would almost certainly mean a return to
cuts for some major spending programmes.
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The government could seek savings from non-public
service budgets, most notably from within the social security
budget. A package of reforms to health-related
benefits, whose costs are currently projected to rise steeply,
would – if the costings are signed off by the OBR – help with
the fiscal arithmetic, but would pose other challenges.
IFS researchers will present their analysis of the outlook for
the Spring Forecast at 1pm on Thursday 6 March, and
will be joined by Simon French, Chief Economist and Head of
Research at Panmure Liberum, for his thoughts on the UK
macroeconomy.
Matthew Oulton, Research Economist at IFS, said:
‘Rachel Reeves has engineered a trap for herself, albeit in
difficult circumstances. Aiming to meet inflexible, pass–fail
fiscal targets by the slimmest of margins was a risky strategy
from the outset. It was always possible that economic conditions
would deteriorate, put her on track to miss those rules, and push
her into making tax and spending changes at what isn't supposed
to be a fiscal event later this month. This scenario is far from
guaranteed and she could still get lucky. But if not, she will
have to choose between her fiscal rules and her commitment to
holding only one fiscal event per year.'
Bee Boileau, Research Economist at IFS, said:
‘The Chancellor has said that her fiscal rules are
non-negotiable. It would therefore be difficult to present the
world and the markets with figures that show them being broken,
and doing so would also lead to months of speculation about what
taxes would be raised in the Autumn Budget. If she prioritises
the fiscal rules and breaks her commitment to a single annual
fiscal event then she faces a stark choice between her promise
not to come back with a further round of tax rises and her
promise of no return to austerity. The Spring Forecast could turn
out to be far more consequential than the non-event it was first
billed as.'
