Chancellor’s Fiscal Rules: A Potential Shift in Strategy
By Alix Culbertson, Political Reporter
As the UK approaches the budget announcement on October 30, the chancellor is reportedly contemplating a significant shift in fiscal policy. This potential change comes amidst increasing pressure to enhance the Treasury’s spending power, raising questions about the future of the government’s fiscal rules.
Understanding Fiscal Rules
At its core, a fiscal rule is a framework designed to limit government borrowing and spending. These rules serve as constraints on how much a government can borrow to finance public expenditure, ensuring fiscal responsibility and sustainability. In the UK, fiscal rules can be set by independent bodies, but since 1997, they have primarily been established by the government itself.
Fiscal rules typically focus on three key areas: the fiscal deficit (the gap between public spending and tax revenues), public debt (the total amount borrowed to cover past deficits), and public spending relative to GDP. The establishment of the Office for Budget Responsibility (OBR) in 2010 marked a significant step in removing the Treasury’s control over the forecasts that underpin fiscal policy, aiming to enhance transparency and accountability.
Current Fiscal Rules in the UK
The current fiscal framework was outlined in Labour’s manifesto, which introduced two "non-negotiable" rules:
- Balancing the Current Budget: The government must ensure that day-to-day costs are met by revenues, effectively balancing the current budget.
- Debt Reduction: Public debt must be on a downward trajectory as a percentage of GDP by the fifth year of the forecast, a principle inherited from the previous Conservative government.
These rules are designed to maintain fiscal discipline while allowing for strategic investments that can stimulate economic growth.
Potential Changes to Fiscal Rules
While the fundamental fiscal rules themselves are not expected to change, the chancellor may explore alternative methods of calculating debt. This could provide additional borrowing capacity without formally altering the existing rules.
Chancellor Rachel Reeves has emphasized the necessity of "borrowing for investment" as a viable solution to the UK’s ongoing productivity crisis. By redefining how debt is calculated, she could potentially unlock up to £50 billion in additional fiscal headroom, allowing for increased public investment.
The Role of Quantitative Easing
One of the strategies under consideration involves the treatment of losses incurred by the Bank of England as it unwinds its quantitative easing (QE) program. Since the 2008 financial crisis, the Bank has utilized QE to stimulate the economy by purchasing government bonds, effectively injecting £875 billion into the economy over 13 years.
As the Bank transitions to quantitative tightening—where it refrains from purchasing new bonds as existing ones mature—it faces annual losses estimated between £20 billion and £50 billion. Excluding these losses from the debt calculation could provide the chancellor with more flexibility in borrowing.
Excluding Institutions and Projects
Another avenue being explored is the potential exclusion of certain institutions and projects from the national debt calculation. For instance, moving entities like GB Energy and the National Wealth Fund, both established by Labour, off the government’s balance sheet could create additional fiscal space.
Additionally, the chancellor may consider excluding specific projects from the overall debt calculation, further enhancing the government’s ability to invest in critical areas without breaching existing fiscal constraints.
Conclusion
As the budget announcement approaches, the chancellor’s deliberations on fiscal rules reflect the broader economic challenges facing the UK. With mounting pressure to boost public spending and stimulate growth, any adjustments to how debt is calculated could have significant implications for the government’s fiscal strategy.
The potential shift in approach underscores the delicate balance between maintaining fiscal discipline and addressing pressing economic needs. As the chancellor navigates these complex considerations, the outcome will undoubtedly shape the future of the UK’s economic landscape.