Rachel Reeves should not turn her spring statement into another budget

The spring statement due on 26 March was meant to be a low-key affair, with Rachel Reeves – who used her October budget to confirm plans for just one main fiscal event a year – expected to provide updated Office for Budget Responsibility (OBR) forecasts but no new policy announcements.

Expectations have since changed, with recent speculation suggesting the chancellor is now planning major fiscal announcements, including the confirmation of welfare reforms laid out in the government's new green paper. Increases in interest rates since October will raise the cost of government borrowing, and these changes alone are likely to wipe out most of the £10 billion of headroom Reeves had against her main fiscal rule. International economic uncertainty has also led other forecasters to downgrade growth projections. If the OBR follows suit, Reeves could be on course to miss her rules – only four months after committing to them.

So it is understandable that the chancellor might feel compelled to act to maintain credibility with the public and financial markets, particularly as the rules are already loose. This would be the wrong move. Fine-tuning policy in response to relatively small changes to fiscal forecasts, and to do so twice a year, is a recipe for unstable, un-strategic policy making. Such behaviour by past chancellors has ultimately undermined, rather than improved, fiscal sustainability as chancellors have tended to give away fiscal windfalls but only partially correct when the forecast worsens.

Given Reeves’ emphasis on the importance of stability to drive growth, she should be willing to delay major policy measures until the Autumn and ensure she does not set a precedent for multiple fiscal events in future years.

There are sound reasons for Reeves to resist policy action

Reeves was right to commit to only one fiscal event per year. Tweaking tax and spend policy twice (or more) each year in response to fiscal forecasts and to chase positive headlines makes it harder to act in a strategic and coherent way over time, creating uncertainty.

Fiscal forecasts can often move by large amounts between fiscal events in response to modest changes in the economic outlook. Since the OBR was set up in 2010, the average revision to the underlying borrowing forecast for the fifth year is around 0.5% of GDP, or around £15 billion. In other words, given that Reeves was meeting her fiscal target in the autumn by only £10 billion, a ‘normal’ revision to the forecast would be enough for Reeves to miss it, but things could easily improve by a similar margin by the Autumn Budget. Or the forecast could worsen further and require a further adjustment from Reeves in the same year. In either scenario, Reeves would be wiser to weigh up policy options over the summer and respond more strategically at the Budget.

The new Charter for Budget Responsibility foresees a scenario like the one Reeves is facing. It allows the chancellor to have a current budget deficit of up to 0.5% of GDP in the spring without missing her rule, with an obligation to act in the Budget if any deficit persists. But this additional flexibility only applies from April 2027, when the rule will apply to the third (rather than fifth) year of the fiscal forecast, so she does not have extra leeway this year.

Even so, Reeves could best demonstrate her commitment to stability by choosing not to make immediate policy changes or tinkering with fiscal policy. This might reassure the wider world that, unlike previous chancellors, she can resist the temptation to tweak policy in a way that ultimately undermines, rather than strengthens, fiscal discipline – because on average they have given away good news while only partially adjusting to bad news, as the figure below shows.

A large forecast change and concerns among investors should guide her

If there is a modest revision, then pledging to act in the Autumn – if the forecast still looks gloomy – would maintain the spirit of her fiscal charter, her commitment to fiscal prudence and should reassure the public and markets. And it would not be entirely without precedent: in March 2016, George Osborne was on course to miss his supplementary fiscal target for debt to fall as a share of GDP in every year by a small margin, but – having already announced major fiscal action the previous July when the Conservatives took power – did not take short-term action to try to correct it.

Nevertheless, a large OBR forecast change moves the calculus. If Reeves thinks a failure to take action would significantly spook financial markets and permanently raise borrowing costs, even if she committed to act at the Budget, then doing nothing would be the wrong course. However, any policy action this March should not set a precedent for future years. History suggests chancellors will struggle to take no action when a new forecast – with good or bad news – is published, but if Reeves chooses to act then she should make it clear that it is an exception. 

Previous chancellors have strayed from holding one fiscal event a year

The policy scorecard of Gordon Brown’s Pre-Budget reports grew over time, George Osborne’s later Autumn Statements were indistinguishable from Budgets, and Philip Hammond’s 2016 commitment to hold one Budget a year did not survive the turmoil of subsequent years. 

Given this temptation, perhaps a longer-term solution might be to abolish spring statements entirely and have just one OBR forecast each year. There are several other forecasters, including the Bank of England, that provide regular economic updates. Aligning fiscal forecasts with the timetable of intended fiscal action – with additional forecasts if emergencies necessitate more frequent action – would lead to a stable fiscal calendar. But the best occasion to have made that change would have been in last year’s fiscal lock legislation, rather than when the numbers look bad. 

There is no doubt that the chancellor is in a bind – though largely one brought on by the risk she took in the Autumn by maintaining such low headroom against her already loose fiscal rule. Given that a modest  forecast downgrade is anticipated, her best option now is to prioritise stability and good policy making and weigh her options ahead of the Autumn Budget.