MNI INTERVIEW:Case For UK To Ride Out Debt Storm To Autumn-IFS
MNI (LONDON) - The UK Treasury could justify sitting tight on fiscal policy through to the autumn despite the recent rise in borrowing costs and even if new forecasts in March show it missing fiscal goals, Senior Research Economist at the Institute for Fiscal Studies Isabel Stockton told MNI, though she added that it would be unsurprising if it used a spring review to squeeze spending.
While the recent rise in gilt yields would add around 0.25% of GDP to debt interest costs in four years' time, pretty much eliminating the headroom against fiscal targets, including the balanced budget rule, Stockton noted that scale of change in the fiscal outlook is not large by historic standards.
"There would be nothing wrong with saying, look, there's been a point-25 or point-three [of GDP] deterioration in the forecast due to movements in interest rates. We are not going to do anything about that for now. Of course, it's an unwelcome change, but we will wait and see what happens, and in the autumn, we may come back and adjust policy in response if it looks to be persistent." Stockton said, adding "Whether that turns out to be a feasible communication strategy, given all the chatter that we've had over the last few weeks, is a different question."
The Office for Budget Responsibility, the official fiscal forecaster, is set to publish new projections on March 26 but as of now there is no new budget scheduled until the autumn. But the rise in borrowing costs has put the government under political pressure, with an emergency question raised in parliament, and media reports have suggested the Treasury is leaving the door ajar to policy changes in the spring. (See MNI INTERVIEW: UK Budget Ups Inflation Pressure - OBR Miles)
"The IFS has called for a one-fiscal-event-a-year kind of standard for a long time and in principle, everyone seems to be in favour, but we never do seem to stick to it in practice," Stockton said.
WIGGLE ROOM AND SPENDING REVIEW
Under the new Labour government's fiscal charter, the current balanced budget rule is set to transition to one where balance is defined as being in surplus or deficit within a margin of 0.5% of GDP in the third year, which would ease the government's constraints, though there is some ambiguity about its implementation.
"Whether that applies in this upcoming March [forecast round] is slightly up in the air," Stockton said.
Missing fiscal targets is par for the course, with the IFS noting that while budget balance has been in the UK fiscal goals for the past quarter of a century it's only been achieved once since 2001-02.
"We as the IFS ... would try to not be, more critical of missing or running a current budget deficit of GBP5 billion than running a current budget surplus of GBP5 billiion four or five years out, because those are economically essentially the same number ... Now, of course, fiscal targets are largely a communication tool, and therefore the optics matter. So I wouldn't be at all confident in saying that there would be no consequences [in showing the target being missed]," Stockton said.
The Treasury has a multi-year Spending Review concluding in spring 2025 and due for publication after the OBR forecasts, which will set out departmental spending plans for at least three years of the five-year forecast period. The government could use it to squeeze spending if the finances are off track. (See MNI INTERVIEW: UK Budget Investment Spending To Curb Rate Cuts)
Stockton noted that in theory the spending review is separate from the fiscal goals as its main aim is to divvy up the existing fiscal pie but "what very often happens is that overall spending plans get topped up" and to maintain spending growth rates the spending envelope for later years also expands, which means it then matters for the OBR's forecasts.
"You could imagine a situation where ... it looks like the target might be breached in the autumn, one would top them up by less. That wouldn't be entirely surprising," Stockton said.