“In response to deteriorating global economic conditions, Rachel Reeves chose to fine-tune her spending plans to continue to meet her fiscal rules“. That’s according to the Institute of Fiscal Studies (IFS) as they share their response to the measures announced by Rachel Reeves earlier today as follows:
Paul Johnson, Director of the IFS, said: “This was just about the smallest fiscal event Rachel Reeves could have managed in the context of her fiscal rules and the minor forecast downgrade presented to her by the OBR. The fact that a fairly run-of-the-mill change to the forecast forced her to cut her spending plans reflects the tiny amount of headroom she chose to leave against her targets last October. In today’s Spring Statement, departmental spending plans and, it seems, welfare policy have been fine-tuned to return to precisely the same amount of headroom that she had previously.
This approach creates two problems.
First, if you are going to have “iron-clad” fiscal rules then leaving yourself next to no headroom against them leaves you at the mercy of events. Ms Reeves has left herself with the same £9.9 billion sliver of headroom against her target to balance the current budget as she had in October, and a very similar amount of headroom against the target that debt should be falling in 2029–30 (£15.1 billion, down from £15.7 billion in October). All of that adds to uncertainty around policy. We can surely now expect 6 or 7 months of speculation about what taxes might or might not be increased in the autumn. There is a cost, both economic and political, to that uncertainty. The government will suffer the political cost. We will suffer the economic cost.
Second, the Chancellor really does seem to risk losing the wood for the trees. If it was right to announce halving the health-related element of universal credit last week, is it now really appropriate not only to halve it, but also then to freeze it for the rest of the parliament? Knocking a pound a week off the main rate of universal credit in order, it seems, to return the fiscal headroom to exactly where it was last October, really does risk undermining the idea that benefit reform, which is much needed, is being made for any reason other than chasing a fiscal number. One could say similar things about small adjustments to spending numbers and finding a billion of tax revenue down the back of the sofa from increased compliance and debt collection: policy is seemingly being fine-tuned in pursuit of an arbitrary and highly uncertain measure of ‘fiscal headroom’.
There were some bright spots in today’s Spring Statement: planning reforms are judged by the OBR to boost the economy, and the government deserves credit for protecting investment spending in tough fiscal conditions. But overall, this was a holding exercise ahead of the really significant decisions later in the year. The June Spending Review will be where the Chancellor’s tighter spending plans crystallise into specific choices and start bumping up against reality, and against her cabinet colleagues. And the Autumn Budget? Even small downgrades to the OBR’s forecasts could mean more action is needed to fill a fiscal hole. And given global risks and shoddy UK data, a bigger downgrade is entirely possible. Indeed, the OBR document points to the downside risk around its all-important productivity assumption. We might be in for another blockbuster Autumn Budget. What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy. That didn’t go well between last July’s election and October’s Budget. I fear a longer rerun this year.”
What did other people think?
For more insight and analysis from other people across the industry into the measures announced in the Spring Statement, check out our IFA Magazine special Spring Statement coverage section.
