Strengthening the UK’s fiscal framework: Putting fiscal rules in their place

The UK’s fiscal framework, including a flawed set of rules, is incentivising bad policy decisions shaped by short-termism and fictional spending plans – and does little to promote fiscal sustainability.

This report warns that successive governments have gamed their fiscal rules: claiming to be adhering to fiscal discipline while frequently announcing short-term giveaways matched by longer-term tax rises or spending cuts that often do not materialise. While the chancellor will use his budget to insist he is working to the letter of the fiscal rules, the paper says he will not be adhering to the spirit of those rules.

Jeremy Hunt will only “meet” his fiscal rules through "worse than fiction" spending plans – plans that Labour is set to remain broadly signed up to – and immediate tax giveaways, as he and his predecessors have done in 85% of fiscal events since 2010. But these spending plans will almost certainly have to be revised, as they have been in nine out of 10 previous spending reviews. Despite this, the OBR will be obliged to say that the chancellor has met his fiscal targets because it has to take Hunt’s (fictional) word for it. 

The report sets out why the current approach is no longer working – and provides a guide for this or future governments to reform the framework to enable them to make better choices. It calls on chancellors to set out a comprehensive fiscal strategy – working out the levels of taxation, expenditure and debt that are consistent with meeting government’s overarching objectives – from which a set of rules can follow. 

With fiscal rules acting as an important signal to the financial markets and the public, and by providing a “commitment device” for government, the paper rejects calls to abolish them and instead sets out a new approach. Its recommendations include: 

• Committing to a single fiscal event per year to allow greater long-term strategic thinking  
• Committing to a new regular cycle of spending reviews, with budgets covering five years and reviewed every three years 
• Redesigning fiscal rules so that they are consistent with government’s objectives, treating investment differently to current spending, binding in the third year of the forecast (rather than the fifth as the current rules do), and providing flexibility to respond to shocks 
• Giving the Office for Budget Responsibility the flexibility to assess whether government policy is consistent with meeting the government’s overarching fiscal objectives, rather than just the letter of specific rules.