Rachel Reeves should scrap her self-imposed rules on debt and borrowing in order to halt the “dysfunctional” policymaking behind Britain’s economic uncertainty, the Institute for Fiscal Studies (IFS) has said.
In a major blow to the chancellor, the think tank said the current system “isn’t delivering” and that Reeves’s fixation on sticking to her fiscal boundaries – which prevent her from borrowing to pay for day-to-day spending, and require debt to fall as a percentage of GDP by 2029/30 – means she could break her promise to deliver sustainable public finances.
In a scathing assessment of her strategy, the economists likened her approach to a driver looking at the speedometer “while ignoring … whether or not the brakes are working”.
The IFS said policies that affect millions of Britons are too easily swayed by “volatility” in economic forecasts, adding to wider financial uncertainty and leaving longer-term challenges ignored.
Its warning comes despite Wednesday’s news of a surprise drop in inflation, and less than a fortnight before the chancellor delivers her spring statement setting out the latest forecasts for the UK economy.
So far, Labour has failed to achieve the growth promised by Ms Reeves and Sir Keir Starmer when Labour came to power. The economy stuttered to a near halt at the end of last year, following Budget uncertainty in November, rising by a meagre 0.1 per cent in the final three months, while figures released on Tuesday showed that the unemployment rate had hit its highest level for five years.
The chancellor came under fire last year after she dramatically abandoned plans to raise income tax in the Budget at the eleventh hour, days after apparently signalling that the move was necessary to meet her fiscal rules.
Looking at a broader range of indicators of how the economy is performing would reduce the incentive for governments to “contort policy” to meet the rules, the IFS said.
The think tank also warned that the credibility of the fiscal rules imposed by successive chancellors, including Ms Reeves, in a bid to reassure financial markets over the UK’s economic plans, has been undermined by “aggressive ‘gaming’ of rolling targets”.
Ms Reeves has always said that her fiscal rules are “non-negotiable”, but in the past, she has been accused of playing “the same silly games” as her predecessors to make the numbers balance to meet her rules.
The IFS said: “This fixation [on the amount of headroom against the fiscal rules] is increasingly contributing to a dysfunctional policymaking process. Meanwhile, aggressive ‘gaming’ of rolling targets and frequent changes to the rules have undermined their credibility. Nor is the framework delivering on its promise of sustainable public finances.”
The report warned that inflexibility around the rules means that whenever forecasts change, and policy has to adjust, “volatility in the forecasts translates into volatility in policy. This makes for rushed and lower-quality tax and spending policy, and adds to economic uncertainty.”
Ben Zaranko, associate director at the IFS, said the system was “like being behind the wheel of a car and judging whether or not you’re driving safely solely by looking at the speedometer, while ignoring the traffic conditions, the weather, and whether or not the brakes are working”.
Helen Miller, director of the IFS, said: “It’s important for all our futures that policies are well designed and that the public finances are sustainable, but the UK’s current fiscal framework isn’t delivering on either front.”
Instead, the IFS has called for a series of economic indicators based around a set of “fiscal traffic lights” to be used to monitor economic performance. This would allow the government to maintain its all-important credibility with the financial markets, it said.
However, it warned that the system cannot be changed immediately, as reforms should only be made from a position of economic “strength”.
David Aikman, director of the National Institute of Economic and Social Research, said the IFS was right that the current system had become too fixated on a single headroom number, which “encourages gaming and drives policy churn as forecasts move around”.
“The acid test for any reform is whether it sets out a credible path to bringing debt down over time, while retaining flexibility to deal with shocks,” he added.
Jim O’Neill, a former Treasury minister who advised Ms Reeves when she was in opposition, told The Independent: “I think intellectually [the IFS report is] pretty sound. The IMF [International Monetary Fund] looks at these kinds of things.”
However, he said the prospect that the government would make such a shift any time soon was “unlikely”. “I hope, and a bit more likely, is they start to use their second fiscal rule: to borrow to invest more. As I believe they should.”
In October 2024, Paul Johnson, the then director of the IFS, said that year’s Budget looked “like the same silly games playing as we got used to with the last lot”, accusing the chancellor of choosing to “pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance”.
A Treasury spokesperson said: “The government’s non-negotiable fiscal rules help to keep interest rates low while also prioritising investment to support long-term growth.
“In the Budget, we doubled the fiscal headroom, and we are cutting borrowing more than any other G7 country with borrowing forecast to be the lowest in six years as share of GDP.”
