MNI: Big UK Fiscal Consolidation Needed To Meet Rules - IFS

UK Chancellor of the Exchequer Rachel Reeves will need to adjust her 2029-30 borrowing outlook by GBP22 billion just to restore the GBP10 billion in headroom she left herself in the spring, the Institute for Fiscal Studies said on Thursday.

"When choosing to operate her fiscal rules with such teeny tiny headroom, Ms Reeves would have known that run-of-the-mill forecast changes could easily blow her off course," IFS head Helen Miller said, commenting on a report which used Barclays’ central economic forecast.

Continuing to leave minimal headroom against pass-fail fiscal rules leaves the chancellor highly exposed to global economic turbulence and forecast downgrades, the IFS said, adding that this risks overly frequent and overly rushed policy adjustments. (See MNI INTERVIEW: UK Debt Stabilisation Insufficient - NIESR Head)

"Limping from one forecast to the next under constant speculation that policy will be tightened again" has costs, Miller said. "Doing the bare minimum at the budget would risk another fiscal groundhog day next year."

CREDIBILITY

Announcing that headroom would be delivered through spending cuts could threaten Reeves' credibility, the IFS warned, as the government has already backtracked on GBP6 billion in cuts for pensioners' winter fuel allowances and working-age sickness benefits.

"Announcing and then failing to deliver cuts might be the worst of all worlds,” it said.

The IFS cautioned Reeves against legislating for the Office for Budget Responsibility to produce one forecast a year instead of two, as this would sacrifice transparency. "Nor would it prevent the Chancellor from finding herself in a similar fiscal bind in a year’s time," it added.

The IFS/Barclays analysis noted that the UK is "by no means an outlier internationally" on traditional measures of debt and deficits. However, markets are being asked to absorb unusually high volumes of gilt sales as the Bank of England sells its assets.