The Chancellor, Rachel Reeves, may be forced to abandon her commitment to holding just one major economic event per year, economic experts have suggested ahead of this month’s Spring Statement.
Dr Isabel Stockton, a senior research economist at the Institute for Fiscal Studies (IFS), has warned that Ms Reeves could face a difficult choice between maintaining her self-imposed fiscal rules or sticking to her pledge of a single annual fiscal event. With economic pressures mounting, it seems likely that the Chancellor may have to prioritise fiscal credibility over her commitment to a once-a-year budgetary announcement.
Ms Reeves is due to deliver a statement on 26th March in response to the latest forecast from the Office for Budget Responsibility (OBR). With rising borrowing costs and sluggish economic growth, she may have little choice but to introduce spending cuts to meet her financial commitments.
Economic challenges threatening fiscal plans
At a recent IFS webinar analysing the upcoming OBR forecast, Dr Stockton highlighted the precarious position of the UK’s public finances. She noted that the Government’s fiscal rules are likely to be met only “by a wafer-thin margin”, making the commitment to a single fiscal event increasingly difficult to maintain.
IFS Director Paul Johnson echoed this sentiment, describing the Chancellor’s desire to limit fiscal events as “commendable”, but suggesting that the Spring Statement may evolve into a more significant fiscal event than she would prefer.
Mr Johnson explained:
“It seems more than likely that the OBR will be downgrading their expectations for fiscal outcomes in a way which will mean that both the letter and the spirit of Rachel Reeves’s fiscal rules will be missed, and therefore she’ll be forced to do something.”
Fiscal rules and the risk of market instability
Ms Reeves has imposed two key fiscal rules to maintain economic stability. The first stipulates that day-to-day government spending must be funded through revenue rather than borrowing. The second requires that debt should be falling as a share of national income by 2028/29.
However, if the OBR’s numbers show that the Government is at risk of breaching these targets, the Chancellor will have to act. Dr Stockton warned that failing to address the situation could damage investor confidence:
“She may be concerned about the signal that would be sent to markets in particular, of perhaps a lack of fiscal credibility if she breaches her fiscal rules at the first time of asking.”
Given the importance of financial credibility, Ms Reeves may feel compelled to make adjustments before the next scheduled budget.
Defence spending and the question of tax increases
Adding to the fiscal challenge, the Government recently announced plans to increase defence spending to 2.5% of GDP by 2027, with a long-term goal of reaching 3% in the next Parliament.
While ministers have emphasised their commitment to national security, Mr Johnson suggested that raising taxes may be the only realistic way to fund the additional expenditure. He pointed out that with major government spending areas such as healthcare, pensions, and education unlikely to face significant cuts, alternative sources of revenue will need to be found:
“It’s going to be tough to find the additional money for defence unless you’re looking at taxes.”
Concerns over economic policy vulnerability
A recent IFS report has also highlighted the risks of the UK’s fiscal strategy, warning that its “pass-fail” nature makes the country highly vulnerable to global economic developments.
The report, published on Thursday, stated:
“In an uncertain and volatile world, aiming to meet pass-fail fiscal rules with close to zero headroom leaves fiscal policy entirely exposed to global economic developments (or, more accurately, what the OBR judges the impact of those economic developments might be) and puts the Chancellor’s (sensible) promise to make fiscal policy changes only once a year at risk.”
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The government’s early missteps?
Simon French, chief economist at Panmure Liberum, suggested that some of the challenges facing the Chancellor could stem from the Government’s own approach in the months following the election.
He questioned whether adopting a more optimistic “Cool Britannia” approach, similar to Labour’s first term in government in 1997, might have helped boost economic confidence.
When asked whether the current economic struggles were driven primarily by international factors or Government decisions, Mr French attributed 80% of the issues to global challenges but noted that 20% could be linked to domestic policy missteps.
He pointed specifically to a decline in consumer confidence from August to October, which he believes was exacerbated by negative messaging around economic challenges. He pointed to comments made by Government figures about the so-called “black hole” in the economy and taxation on wealthier individuals.
“I think the damage to sentiment there is that 20% element that has made things harder for the Chancellor than it would have been, had they perhaps… channelled some of the sort of Cool Britannia of ’97 the last time they came to power.”
Conclusion
With mounting fiscal pressures and an impending OBR forecast that is likely to deliver bad news, Rachel Reeves faces a difficult decision. Breaking her commitment to a single fiscal event may be necessary to maintain economic stability and market confidence. As the Spring Statement approaches, all eyes will be on the Chancellor to see whether she holds firm or adapts her approach in response to the growing financial challenges.
