MNI INTERVIEW: UK To Avoid Fiscal Rules In Spending Review

The UK Treasury will avoid producing new fiscal rules to accompany a year-long spending review to be announced Wednesday, James Smith, Research Director at leading think tank the Resolution Foundation, told MNI.

"I presume they will say they will come back at the Budget with a new fiscal framework," Smith said in an interview. "They don't want to tie their hands to a fiscal stance that's too tight or make promises to deliver against particular rules when that would be economically damaging," Smith said.

This means that the official, independent forecaster, the Office for Budget Responsibility, headed by Smith's former colleague Richard Hughes, will be unable to evaluate the government against any fiscal rules when it produces a new set of multi-year economic and fiscal projections, also on Wednesday.

"You have high policy uncertainty at the moment," Smith said, noting that the run-up to the spending review has featured talk of public sector pay freezes and reductions in the aid budget after Chancellor of the Exchequer Rishi Sunak extended expensive income-support schemes initially scheduled to end in October to March.

"What would tie all this together would be a set of fiscal objectives, a set of economic objectives and people could understand what they are trying to do in that context," he added.

MANIFESTO GOALS

In its 2019 election manifesto, the governing Conservative Party set out three fiscal goals: balancing the current budget in three years; keeping the debt-interest-to-revenue ratio below 6% and ensuring public sector net investment averaged no more than 3% of GDP. Smith thinks the OBR will cite the manifesto pledges, despite their not having been adopted as formal targets, alongside previous official goals.

"The OBR are in an awkward position here because they will be assessing against a set of rules that the government has said they are reviewing and plan to change," Smith said.

The Foundation estimates that the government will need a GBP40 billion fiscal consolidation, equivalent to some 2% of GDP just to address its structural deficit.

Nevertheless, there are rays of light. Debt interest costs are low due to rock bottom borrowing rates and the rate of interest on safe assets looks set to remain below growth rates – the R-G measure that former IMF economist Olivier Blanchard has pushed into the spotlight as a sustainable finances measure.

Smith said that the government is probably on track to meet the debt interest rule and "You will have very favourable R-G dynamics at the moment."