How can the government avoid a repeat of this year’s welfare reform debacle?

In May, I argued that “the benefits of having only one Office for Budget Responsibility (OBR) forecast a year increasingly outweigh the costs”. This approach would, I wrote, encourage and enable chancellors to announce new fiscal policy measures only once a year and to develop policy for those events in an open and considered manner, rather than – as now – holding two substantive fiscal events a year, in which new measures are rushed out in response to often small changes in the official forecast. The other benefit would be in allowing the OBR to spend more time on wider fiscal analysis, such as fiscal risks and sustainability, which are crucial for strong fiscal policy.

There would be costs involved, with the Institute for Fiscal Studies disagreeing with me ¹² Emmerson C, Miller H, Zaranko B, How frequently should the OBR produce forecasts?, Institute for Fiscal Studies, 21 July 2025, https://ifs.org.uk/articles/how-frequently-should-obr-produce-forecasts  on where the balance of risks lie. But the government’s woeful handling of its welfare reforms has served as the latest reminder of the need to do things differently.

The spring statement illustrated the problems with fiscal tinkering

The IfG has repeatedly highlighted the problems caused by successive UK chancellors’ approaches to fiscal policy making, with the UK an international outlier in holding two fiscal events each year and  running an unusually closed budget process. UK chancellors seem unable to resist fiscal ‘fine tuning’ (or tinkering), as has been illustrated in dreadful detail this year. The government rushed out a package of cuts to incapacity and disability benefits in March that seemed carefully calibrated to just offset the small forecast downgrade from the OBR in the spring statement. These hurried policies seemed to cut across a more considered reform process already underway in the Department for Work and Pensions (DWP).

But, having rushed that package through, without the proper time for policy development, consultation and explaining the rationale to Labour backbenchers and the public, the government has been forced to row back and drop most of the changes. This came on top of Rachel Reeves’s decision to reverse much of her planned cut to winter fuel payments. 

There are longer-term consequences too, with the disability benefit U-turn probably leaving the government more constrained in its ability to make sensible lasting reforms in this area than if it had not rushed out poorly designed policy in March.

Chancellors should avoid immediate reactions to every small forecast

This sort of fiscal tinkering is not unique to this chancellor. It is a long-standing problem. But it is made worse by having so little headroom against fiscal rules. Reeves left just £10bn of headroom in her autumn budget, similar to Jeremy Hunt’s £9bn in his last budget, but much less than the headroom that was maintained by George Osborne throughout virtually all of his chancellorship. ¹⁵ Office for Budget Responsibility (2025), Economic and Fiscal Outlook: March 2025, Figure 7.2, https://obr.uk/efo/economic-and-fiscal-outlook-march-2025/

£10bn is a small number in a context where there is considerable uncertainty around the OBR’s central forecast and where that central forecast moves on average by £15bn every six months. As a result, forecast volatility is matched by policy volatility – and that is damaging to the quality of UK policy and to fiscal sustainability.

A much better position would be for chancellors to be able to credibly demonstrate commitment to fiscal discipline through just one fiscal event a year, giving themselves time to develop policies develop robust and lasting policies rather than reacting to every small forecast move.

Reducing to one forecast is not the best option

As we argued in a report last year, cutting out one of the official forecasts each year would not be our first choice. The best option would be to achieve a position where the OBR could publish two forecasts a year but the chancellor did not feel compelled to announce policy changes on both occasions. 

This would require chancellors having the discipline not to indulge in fiscal giveaways when forecasts improve, and to have enough credibility to convince financial markets that they could be relied on to respond in the autumn to any fiscal deterioration indicated in the spring forecast.

We suggested some options to try to achieve that. These included: 

• Placing more emphasis on the uncertainty around the fiscal forecasts and the probability of meeting fiscal rules, to reduce debate about the ‘headroom’ between the central forecast and the fiscal rules.
• Asking the OBR to provide a more qualitative assessment of compliance with the fiscal rules, recognising the forecast uncertainty, to move away from the current pass/fail judgement on adherence.

The main recommendation we made in this vein, which Reeves has adopted but is not yet in force, is to target a range for the current budget, rather than a specific point. From spring 2027 onwards, this will be a feature of Reeves’s rules: at future spring forecasts (though not at budgets) ¹⁶ The wording of the Charter for Budget Responsibility is somewhat vague about when the range can be used, as it does not specify whether the spring or autumn fiscal statement constitutes the annual “fiscal event”. But the intention of the Treasury is that the range should not apply at the budget (in the autumn) but will apply for the intervening forecast (in the spring). , she will be judged to meet her fiscal rules if the current budget three years ahead is forecast to be anywhere between a surplus of 0.5% of GDP and a deficit of 0.5% of GDP. 

Had that been in place this spring, perhaps Reeves would have felt able to wait until the autumn to announce new measures, giving herself more time for proper policy development. But to be truly valuable, the chancellor needs to be willing – and feel able – to use the flexibility it affords. In the spring, Reeves felt the need to act precipitately despite the forecast (in the absence of policy action) still showing a small current surplus – technically complying with her rule. 

There would be costs to cutting one of the two official forecasts

The intense political and media attention applied to the twice-yearly OBR forecasts, exacerbated in recent years by chancellors retaining minimal ‘headroom’ against their fiscal rules, inevitably, puts pressures on chancellors to take fiscal action twice a year.

Dropping one OBR forecast would reduce this, but such a move is not without costs. As OBR chair Richard Hughes noted in evidence to the Treasury Select Committee, “doing two forecasts a year is international good practice...were we to reduce the number of forecasts to one, that would make us one of the least fiscally transparent countries in Europe and of any major advanced economy”. That could be costly if it caused financial markets to question the fiscal rectitude of the government.

It might also allow the government to ignore emerging fiscal problems. The benefit of having more time to develop policy will only be realised if the Treasury reacts to its internal forecasts (which use the same model as the OBR) showing a deterioration. The risk is that they feel less compelled to face up to difficult choices absent an official published forecast.  

There are other ways to incentivise and enable chancellors not to tinker

Implementing the range target more quickly – as the IFS has advocated ¹⁹ Emmerson, C., Miller, H. and Zaranko, B. (2025), ‘How frequently should the OBR produce forecasts?’, Institute for Fiscal Studies, https://ifs.org.uk/articles/how-frequently-should-obr-produce-forecasts  – is worth trying. Changing the way that official fiscal forecasts are presented to reduce emphasis on the central forecast – and, potentially, as the International Monetary Fund ²⁰ International Monetary Fund (2025), United Kingdom: 2025 Article IV Staff Report, https://www.imf.org/en/Publications/CR/Issues/2025/07/24/United-Kingdom-2025-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-…  have proposed, to remove a formal evaluation of the fiscal rules in the spring – is worth doing but probably will not make a huge difference, given the entrenched tendency in UK media, politics and financial markets to focus on the central numbers.

The chancellor’s ability to make further changes to the fiscal rules and framework, or to make use of any flexibility afforded by a range target, may be limited if financial markets interpret that as backsliding on her commitment to fiscal sustainability. It is impossible to know how huge numbers of market players might respond but, with debt and borrowing high, the UK government is vulnerable to changes in market sentiment – and market players may be concerned by the government’s recent inability to follow through with announced spending cuts.

One way to convince markets and the public about the government’s commitment to future fiscal tightening, even if it does not take immediate action alongside any spring forecast downgrade, could be to publicly set out policies that the government would plan to adopt if the forecasts do not improve by the autumn – or even legislate for them on a conditional basis. These would in the first instance need to be simple changes that were easy to implement and commanded support and so did not require extensive policy development – though over time the government could start to work up a wider range of alternatives to have to hand. Such a statement, or legislation, would provide a clearer signal of the future direction of policy, allow the government to demonstrate that such policies commanded sufficient support, and (once carefully developed) provide a readymade set of sensible policy options to draw from if the forecasts were to deteriorate. This is an early idea that would need further testing but may be another way forward to try to avoid constant damaging fiscal tinkering, while ensuring fiscal discipline and building fiscal credibility.

Something has to change in the government’s use of fiscal forecasts

The current state of play is arguably the worst of all worlds. The desire to be seen to be fiscally disciplined – while being unable or unwilling to maintain greater headroom against the fiscal rules – has led the government to rush out poorly-designed policies that it has had to reverse. That has undermined good policy design and compromised the government’s ability to manage the public finances. Something has to change.

The government needs to remain committed to long-run fiscal sustainability – and, given the state of the UK’s public finances, that means the government facing up to difficult choices over tax and spending, particularly if forecasts deteriorate further. But to ensure that policies are well-designed and can endure, government needs to take time to develop them properly – and that means avoiding feeling compelled to rush to take action in response to every small forecast move.