Reeves fixated on 'dysfunctional' borrowing rules, says IFS

"The Institute for Fiscal Studies (IFS) said the chancellor's approach "needs a rethink" to move away from constraints that "require some measure of borrowing or debt to be below a particular threshold in a specified year". Reeves set her so-called fiscal rules when Labour came to power, which determine how much "headroom" the government has for its tax and spending plans. The Treasury said: "The government's non-negotiable fiscal rules help to keep interest rates low while also prioritising investment to support long-term growth.""

"Ben Zaranko, associate director at the IFS, said the current framework was judging economic sustainability by a system that is "boiled down to to a single number". At the Autumn Budget, the Office for Budget Responsibility forecast that the amount of headroom the government has against its borrowing rules will be 22bn in five years' time. This was more than earlier forecasts of 9.9bn."

"But research from the IFS, funded by the Joseph Rowntree Foundation, suggests that instead of "passfail fiscal rules", the UK "would be better served by a new framework based around a set of 'fiscal traffic lights'". Zaranko said: "Moving to a broader set of fiscal indicators, assessed according to a traffic light system, would provide a better picture of the government's overall fiscal position, and reduce the incentive for governments to contort policy in pursuit of a particular 'headroom' number.""

Chancellor Rachel Reeves' fiscal framework, centered on numerical borrowing thresholds, is criticized as constraining policymaking and fostering dysfunctional outcomes. The Institute for Fiscal Studies recommends rethinking rules that require debt or borrowing to be below specific thresholds in a given year, arguing the framework reduces headroom and incentivizes policy contortions. The Treasury defends non-negotiable fiscal rules as keeping interest rates low and supporting long-term investment. The Office for Budget Responsibility forecast larger headroom than earlier estimates. Research funded by the Joseph Rowntree Foundation proposes a 'fiscal traffic lights' system using multiple indicators to assess fiscal sustainability and policy flexibility.

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