.png)
8 hours ago
1
Leading economists are urging Rachel Reeves to bend her fiscal rules or raise taxes instead of cutting welfare when she responds to growing spending pressures in her spring statement later this month.
The independent Office for Budget Responsibility (OBR) is expected to downgrade its forecasts for the UK when they are published on 26 March, wiping out the headroom to meet the chancellor’s rules.
Treasury sources say Reeves is determined to respond with spending cuts, including to welfare, despite opposition from within her own party, having already raised taxes by £40bn in her October budget.
Reeves’s fiscal rules allow the government to borrow to invest, but oblige her to balance day-to-day spending against tax receipts. A separate rule calls for public debt to be falling by the end of the forecast period – with the chancellor adopting a looser definition of debt than her predecessors that increases her latitude to borrow to fund long-term infrastructure.
The chancellor said on Friday that the government would “get a grip” on welfare spending. “We need to spend more on national defence, but we need to reform our public services and we need to reform our broken welfare system,” she told broadcasters.
However, some economists are urging the chancellor to take a different course. “Are there alternatives to this strategy that wouldn’t spook the market? The answer is clearly yes,” said David Blanchflower, a professor of economics at Dartmouth College in the US and a former Bank of England policymaker.
“In a world where exchange rates are changing, the tariff rules are unclear, and uncertainty is prevailing, you probably want to loosen your hand on the tiller and try to worry about the major issues that you have, which is not the fiscal rules,” he added.
Blanchflower was among the signatories of a letter to the Guardian supporting Reeves’s growth policies in the run-up to last year’s general election.
Michael Jacobs, a professor of economics at the University of Sheffield and a former adviser to Gordon Brown, said the radically altered geopolitical situation – with the US apparently withdrawing support for European defence – meant Reeves would have to show flexibility.
“The sheer arithmetic suggests that something’s got to give,” Jacobs said. “The argument that you could make for changing your rules is that national security is at stake.”
Last month, Keir Starmer announced an increase in defence spending to 2.5% of gross domestic product by 2027, paid for with deep cuts in the overseas aid budget. When the development minister Anneliese Dodds quit in protest, she said in her resignation letter that she had expected the government to look again at its fiscal rules as a result of the changing global situation.
Starmer has promised to lift defence spending further to 3% of GDP, though he has not set a deadline. Many economists doubt that can be accommodated within Reeves’s self-imposed criteria, without deep cuts to spending elsewhere.
Jacobs suggested the chancellor might ultimately have to exclude defence spending from the rules, as Germany plans to do – and could also issue “security bonds”, encouraging the public to invest in defence. “The question for me is, does the government have the courage to seize the moment?” he said.
after newsletter promotion
Benjamin Caswell, a senior economist at the National Institute of Economic and Social Research, endorsed the idea of excluding defence spending from the fiscal rules – suggesting it would be viewed differently by investors to Liz Truss’s spending splurge on tax cuts.
“I think markets would accept it, to be honest, because I think spending for national defence when geopolitics has changed is quite different. And I think that they would be receptive,” he said. “The world has changed since the budget in October.”
Danny Sriskandarajah, the chief executive of the New Economics Foundation thinktank, said: “Ultimately, the fiscal rules are arbitrary and regularly change, and I think there are good grounds why they need to change once again.”
He added that taxes would most probably have to rise in the medium term, as the government tried to juggle demands for defence spending with the needs of an ageing society. “We can’t go on like this. We need a grown-up conversation as a society about what we think the size and the shape of the state should be,” Sriskandarajah said.
Alfie Stirling,the chief economist at the Joseph Rowntree Foundation, echoed that point. “Something has to give,” he said. “This would have been true even without the pressure for higher defence spending since [Donald] Trump came to power, because we have such big pressures from demographic shifts on public services.
“There’s a point at which it becomes really hard to hold together an electoral coalition in 2029 if you’ve got almost every part of the state creaking.”
Jo Michell, a professor of economics at the University of the West of England, said: “I think it’s inevitable that more tax rises come. This bit feels like it’s death by a thousand cuts at the moment, and it’s it’s still going to get to the same inevitable end point.”
Not all analysts agree that Reeves has room for manoeuvre as she approaches her 26 March statement, however.
Paul Johnson, the director of the Institute for Fiscal Studies, said: “My sense is that these rules are about as loose as is reasonable. And we’ve seen how jittery the debt markets are.” Gilt yields, which determine the interest the government pays on its debt, have risen since the October budget.
