The Institute for Fiscal Studies (IFS) has urged British governments to move away from a narrow fixation on numerical fiscal headroom and to adopt a more flexible approach for evaluating public finances.
In a report published on Thursday, the IFS said an obsession with the amount of space governments claim to have to meet specific targets has encouraged policy choices designed to meet those targets rather than to reflect a fuller picture of the fiscal outlook.
The think tank proposed replacing the current emphasis on strict numerical goals with a fiscal strategy that offers broad direction instead of precise targets. Under the IFS plan, finance ministers would outline an overall strategy - a direction of travel that would be updated on a regular basis - rather than pinning policy to exact numbers.
As part of the proposed framework, a wider set of indicators would be monitored and presented using a red-amber-green traffic light system. Those indicators would include measures such as borrowing, overall public debt and the cost of servicing that debt. The Office for Budget Responsibility (OBR) would be responsible for assessing those indicators and reporting against the traffic-light matrix.
The IFS acknowledged a potential downside: moving to a looser framework could lower the political and practical barriers to higher borrowing. Even so, the report argued the trade-off is justified if it reduces the degree to which fiscal policymaking becomes dysfunctional in service of meeting narrowly defined targets.
The report comes as Finance Minister Rachel Reeves is projected to balance day-to-day public spending and tax receipts by 2030 only on the assumption that planned tax increases are implemented in the coming years - steps analysts view as unlikely, given a general election scheduled for 2029.
The IFS also referenced prior fiscal plans from the former Conservative government, noting that those plans included deep future spending cuts. Those cuts were characterized by the former head of Britain’s budget watchdog as "worse than fiction".
Ben Zaranko, associate director at the IFS and the author of the report, said breaking the fixation on fiscal headroom could create space for a more meaningful debate about the country's fiscal options and challenges. The Institute argued that a broader scoreboard of indicators would give the public and policymakers a clearer sense of the overall fiscal position and would reduce incentives for governments to contort policy to meet single-number targets.
Indicators proposed for assessment by the OBR include:
- Borrowing
- Public debt
- Debt interest costs
The IFS report states that the new system would allow a less rigid assessment of fiscal health while acknowledging the political risk that looser rules could make borrowing more attractive to governments. The think tank concludes that accepting that risk is preferable to continued distortions in policymaking caused by an overriding focus on fiscal headroom.