Current UK fiscal rules

What are fiscal rules?

Fiscal rules are restrictions on fiscal policy the government sets itself to constrain its own decisions on spending and taxes. The independent Office for Budget Responsibility, as the UK’s official forecaster, is the body that judges whether the government is on course to meet them. Fiscal rules were first used in 1997, but have changed over time.  

What are the government’s current fiscal rules and is it on track to meet them?

The Starmer government set out new fiscal rules in October 2024, at Rachel Reeves’ first budget as chancellor following the July 2024 general election. There are now three main fiscal rules, a ‘fiscal mandate’ and two ‘supplementary targets’. The government is currently on track to meet these. 

Rule 1. The current budget should be on course to be in balance or surplus by 2029/30 (‘stability rule’)

This rule requires that day-to-day costs are met by revenues by 2029/30, at which point the government should only be borrowing to invest according to the OBR’s forecast. The rule will continue to bind in 2029/30 until that becomes the third year of the forecast horizon (which will happen in 2026/27). From then, the rule will roll forward but will bind in the third, rather than the fifth, year of the forecast period. The rule will also change from 2026/27 so that ‘current budget balance’ is defined as being in surplus or deficit within a margin of 0.5% of GDP.  

In its latest forecast, in October 2024, the OBR estimates that the current budget will enter surplus earlier than the 2029/30 deadline (by 2027/28) but that the government is only on track to meet the rule by a narrow margin, predicting that the current budget surplus in 2029/30 will be just £9.9bn, a relatively small figure for ‘headroom’. 

Rule 2. Net financial debt should fall as a share of the economy in 2029/30 (‘investment rule’)

This rule requires that public debt – newly defined as public sector net financial liabilities (PSNFL), or ‘net financial debt’ – is forecast to be lower in 2029/30 than 2028/29 as a share of the economy.

This measure includes all the debt and assets counted within public sector net debt (PSND), the indicator used in previous UK fiscal rules. However, it also accounts for other financial liabilities, most notably funded pensions obligations (like local government schemes) and standardised guarantees, as well as illiquid financial assets such as equity stakes in private companies and loans (including student loans), which are counted on the other side of the balance sheet.

Like the stability rule, the investment rule will apply to the forecast for 2029/30 until three years before 2029/30, at which point it will continue to roll forward but will begin to bind on the third year of the forecast period.

Based on the OBR’s October 2024 forecast, PSNFL is set to peak at 84.2% of GDP in 2026/27. This means the government is on track to meet this rule several years ahead of its current deadline of 2029/30, when it will have fallen to 83.4% of GDP. The government is forecast to have more headroom against this rule, £16.9bn, than for the current budget rule.  

Rule 3. Some types of welfare spending must remain below a pre-specified level (the ‘welfare cap’)

This rule provides additional constraints on spending on social security payments and includes roughly half of welfare spending. Notably, payments to pensions and payments ‘most sensitive to the economic cycle’ (such as Jobseekers’ Allowance, and associated housing benefit) are explicitly excluded. Reeves has increased the cap by 20% for total annual welfare spending over this parliament, to £194.5bn by 2029/30. She has also increased the margin for overspend on the cap from 2 to 5%.

A welfare cap has been in place since 2014 but unlike earlier iterations, Reeves’ rule adjusts if changes made to the economic forecast increase expected social security spending – for example, if wages are predicted to be lower or unemployment higher, leading to higher social security payments. This rule effectively limits the extent to which any policy changes can increase social security spending. According to the October 2024 forecast, the government is on track to meet its specified welfare cap in 2029/30 with a margin of £9.7bn.

Do these rules always apply?

The Charter for Budget Responsibility allows the Treasury to temporarily suspend the rules in the event of a “significant negative shock”, as Rishi Sunak did as Chancellor during the Covid-19 pandemic, though it does not specify what would constitute such a shock, meaning this is at the Treasury’s discretion. However, unlike previous fiscal rules, if this happens the OBR will be asked to provide its view of how severe the shock is.  

If the rules were suspended, the chancellor would need to present to parliament, alongside every subsequent fiscal event, a plan for returning the public finances to a position where the rules could be reinstated.  

How do these rules differ from recent fiscal rules in the UK?

In many ways Reeves’ new rules share similarities with past iterations adopted by previous governments.  

While Reeves’ immediate predecessor, Jeremy Hunt, targeted the overall deficit, chancellors like Gordon Brown, who first introduced fiscal rules, and George Osborne used a rule like Reeves’, requiring the current budget be in balance in a future year. Reeves’ focus on the current budget should enable governments to continue to spend on investment that will bring long-term benefits, rather than making cuts to investment budgets to satisfy short-term fiscal rules focused on total deficits, as had happened often under the previous government.

Likewise, while previous chancellors, including Sunak and Hunt, also required debt to fall as a share of GDP in a future year, Reeves will be using a different indicator (PSNFL) to measure this.

Reeves’ move to a three-year horizon, from 2026/27, is another departure, though reverts to common practice of chancellors from 2015 until the the pandemic. Longer five-year horizons, like those used by Sunak and Hunt, give the government more leeway: it can be forecast to run large deficits and have debt rising as a share of GDP for most of the forecast horizon.  

One interesting innovation new to the UK is the current budget rule from 2026/27’s definition of a current budget balance as a surplus or deficit within 0.5% of GDP, rather than having a single target (such as that the current budget be simply ‘in surplus’). This should help chancellors to refrain from over-active policy making in response to relatively small changes in the forecast. f GDP for most of the forecast horizon. 

How do fiscal rules form part of the broader fiscal framework? 

Reeves’ updated Charter for Budget Responsibility sets out a broader framework for decision making, of which the fiscal rules are a foundational part. This includes:

1. A ‘commitment to the principle’ of one major fiscal event per year.
2. Spending reviews every two calendar years, setting Departmental Expenditure Limits for a minimum of three of the five year forecast period.
3. The introduction of the ‘fiscal lock’ that was included in the Budget Responsibility Act 2024, meaning ‘fiscally significant’ decisions can be scrutinised by the OBR.
4. Greater sharing of Treasury data on spending pressures with the OBR, and the empowerment of the OBR to forecast overspends against Department Expenditure Limits.

The government has also stated that it will take steps to guarantee sound financial investment using existing and new spending controls. New institutions like the National Infrastructure and Service Transformation Authority and the Office for Value for Money, alongside the National Audit Office, will be given oversight to ensure that capital budgets are well spent and the OBR will conduct analysis of the long-term impacts of capital investments at each forecast.