When a Spring Cleaning isn’t Needed
Due to worse than expected GDP figures, it is widely believed that the narrow fiscal headroom of £9.9 billion forecast by the OBR in October 2024 has since evaporated.
As the government remains committed to their pre-election manifesto pledge that rules out tax rises on working people and given that the fiscal rules have only recently been amended, it appears that scaling back expenditure is the only politically feasible option remaining.
Therefore, despite the commitment to one fiscal event per year, it is widely expected that the upcoming Spring Statement will deliver significant spending cuts to ensure the government continues to meet its fiscal rules.
On the surface this seems reasonable…
But this static exercise of balancing the books is short sighted. The fiscal rules are supposed to confer the sustainability of the public finances. In other words, ensure that the growth of debt as a share of national income remains bounded.
However, sustainability is a complex artefact, composed of both past actions and future expectations - and these rules do not capture the nuanced position in which the UK economy currently sits.
Yes, business and consumer confidence have remained low since the budget announcement last October. But this is because firms anticipate rises in the minimum wage and increases in their National Insurance contributions (NICs) and are taking action today in order to smooth over these costs – as opposed to facing a jump in their costs in April.
However, these costs have not yet been offset by the benefits of the spending measures announced last October as these are yet to be fully implemented. As a result, we are already starting to see the cost of the fiscal loosening, without seeing the corresponding benefit. By acting now to change spending plans before they are enacted, the government risks further exacerbating negative sentiments.
Moreover, drawing firm conclusions based on a few data points about economic growth in the medium term - and what this could ultimately mean for the sustainability of public finances - is unwise.
Before insisting that spending cuts must happen, it will be crucial to wait until the additional government spending announced in the budget comes into effect from April 2025.
By October, we forecast that GDP growth will pick up, the fiscal constraints will loosen, and the fiscal rules may once again be met. However, if the Chancellor believes that the economic outlook has changed fundamentally since her autumn budget (and there is a case to be made for that), she should state it plainly and put forward the case for a fresh approach rather than tinkering around the edges.
Part of ‘fixing the foundations’ was to remove the malaise of short-term thinking with the accompanying frequent changes of policy. The Chancellor shouldn’t undermine this by responding to short term sentiments before seeing how effective her policy interventions are.
At a time when clarity and consistency are most needed, it instead seems that the upcoming Spring Statement will be an exercise in fiscal targetry, focused on the need to meet increasingly complex and arbitrary fiscal rules, rather than fostering a long-term fiscal strategy that will be conducive to growth.
Dr Benjamin Caswell is a Senior Economist working in the Macroeconomic team at the National Institute of Economic and Social Research.
