MNI INTERVIEW: UK Could Meet Budget Rules With Legislative Fix
MNI (LONDON) - The UK government has the capacity to bring forward a provision allowing it more flexibility around its fiscal targets, potentially allowing it to avoid being forced into announcing tax hikes or spending cuts in March, though politically such a move would not be without risk, an economist at the Institute for Government thinktank told MNI.
The recent gilt yield surge has sparked speculation that Chancellor of the Exchequer Rachel Reeves could be forced into an unscheduled Spring Budget if March 26 fiscal forecasts from the Office for Budget Responsibility show the public finances missing the current balanced budget rule. But Thomas Pope, deputy chief economist at the IFG, said the Treasury's preference would be not to be overly reactive to market turbulence, with one option being to bring forward the date for introducing flexibility around the rules.
"I think that as far as possible they will do as little as possible. I think in an ideal world, they should do nothing. And if they're still on course to meet their fiscal rules, I suspect they will. I think if they do decide to do something, they'll try and do something that is as minimal as possible," Pope said in an interview.
The balanced budget rule in the fiscal charter published alongside the October Budget requires day-to-day spending and revenue to match by 2029/30, but the definition changes from 2026/27 to allow a surplus or deficit of 0.5% of GDP rather than strict balance. This budget balance rule is not yet fixed in law.
The idea of allowing a half percent of GDP buffer in the March forecasts is that if it persists until the Autumn Budget "then you have to take action ... you can't persistently have the current budget in deficit, but effectively that is designed for exactly this kind of situation," Pope said.
PRESSURE EASES
"My understanding is that the Treasury didn't introduce that straight away because they thought that was giving themselves too much leeway to both only be targeting the fifth year (2029/30) and to have this extra flexibility ... as to whether they could just introduce it ... procedurally, it probably wouldn't be that hard, because the Charter for Budget Responsibility is just secondary legislation," he added.
Another technical option for Reeves would be to tweak longer-term spending assumptions to meet the balance budget rule in 2029-30.
The latest market moves have eased pressure on Reeves. The 10-year gilt yield peaked at 4.921% on Jan 9 and dropped to 4.463% on Jan 17, almost fully reversing the move higher, as expectations of 2025 Bank Rate cuts shifted from little more than one back to more than two. (See MNI INTERVIEW: Gilt Hit Weighs On Inflation - Ex-BOE Saunders )
Nevertheless, with narrow headroom over the strict balanced budget rule, the OBR could still predict a miss. A technical fix , while legally permissable, would be a tough political sell, Pope noted. (See MNI INTERVIEW: Case For UK To Ride Out Debt Storm To Autumn-IFS)
"This would be a very pragmatic, sensible thing to do ... I'm sure the opposition would slam her for it. But really, is it any different to making a slight tweak to the final year spending assumption that you're probably not going to keep anyway? Economically, technocratically, absolutely not. So I think it would be a good test of how committed she is to sensible, pragmatic policy," Pope said.
The UK's economic stagnation is a key fiscal concern and Pope said Reeves should use her March 26 presentation to parliament "as an opportunity to really hammer the growth message and not fiscal measures."