MNI INTERVIEW: Sunak To Keep Fiscal Rules Vague At UK Budget

UK Chancellor of the Exchequer Rishi Sunak looks set to keep any long-term rules for government borrowing vague if he announces any such targets at Wednesday's budget, wary of coming under pressure to announce belt-tightening measures while uncertainty over the recovery still persists, a senior economist at the Institute for Government told MNI.

While Sunak could provide broad brush fiscal goals, committing to any detailed could prompt speculation over the potential spending cuts or tax hikes necessary to meet them, increasing the risk of policy error, the IFG's Thomas Pope said in an interview.

A "concern about introducing fiscal rules now is it will put pressure on the government to be announcing tax rises now rather than in, say, 12 months' time in order to try and comply with a set of rules. Things may turn out to be much better so tax rises or spending cuts won't need to be as large," Pope said.

ECONOMIC UNCERTAINTY

Uncertainty around the Office for Budget Responsibility economic and fiscal forecasts will be unusually high, he said.

Pope's views chime with those of former Office for Budget Responsibility head Robert Chote, who spoke at an IfG event this week. The OBR is the official body, tasked with judging whether the government has a greater than 50% chance of meeting its targets.

"It does make the job of the OBR much easier if the government sets out its objectives transparently, even if rather arbitrarily, rather than the government saying it wants to be responsible and therefore the OBR is going to have to work out in the current climate what responsible means," Pope said.

In its most recent forecasts in November the OBR fulfilled its mandate by comparing its projected outcomes against the government's old fiscal rules, set out back in 2017, although the government was no longer trying to meet them.

Wednesday's Budget looks set to see a repeat.

"They didn't make a big deal of it … it is not like the OBR's judgement (on whether the targets will be met) has any legal force there and I think that they would do the formal judgement but would probably also put in the text that … this is an extraordinary time for fiscal management," Pope said.

POSTPONED, NOT CANCELLED

The Treasury, though, is institutionally in favour of having fiscal rules, and Sunak is likely to bring in a full set further down the line.

"It is quite a useful internal government device to have fiscal rules when you are trying to trade off spending and tax rises and when every department is asking for everything," Pope said.

An oddity of the way the OBR scores fiscal policy is that while it typically accepts planned cuts in expenditure, even if they lack detail, it requires detailed justification of the revenue assumed to be raised through tax changes.

This requirement for detail may add to Sunak's incentives for delaying specifying detailed fiscal rules, given the potential for embarrassment if he opts, as has been reported, for a new digital tax. It would be challenging to calculate potential revenues from such a measure, given the complex nature of the digital industry.