Rachel Reeves needs wider headroom against fiscal rules, ex-Bank of England deputy says

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The former Bank of England deputy governor Charlie Bean has urged Rachel Reeves to create much wider headroom against her fiscal rules – a decision likely to require significant tax rises or spending cuts.

Bean suggested that the current slim margin of less than £10bn, had led the chancellor to “fine-tune” the government’s tax and spending plans to meet the Office for Budget Responsibility’s (OBR) forecasts five years ahead.

“Government spending is about one and a quarter trillion, so £10bn is a small number … and it is a small number in the context of typical forecasting errors,” he told BBC Radio 4’s Today programme.

He added: “She should aim to operate with a larger margin of headroom, so previous chancellors have typically operated with headroom of the order of £30bn.

“Because she has chosen about a third of that … it is very easy for numbers to go in the wrong direction and she finds she has to neurotically fine-tune taxes to control the OBR forecast that is several years ahead.”

Bean, who is also a former member of the OBR’s budget responsibility committee, added: “The original sin is that she should not have chosen to operate with such a tight margin of error.”

Reeves increased taxes by a historic £40bn in her budget last October. However, with most of the proceeds earmarked for public services, she left herself on track to meet her strict fiscal rules with a relatively slim margin.

That “headroom” was set to be wiped out before the spring statement in March, prompting the scramble for savings that led to the £5bn cuts to disability benefits, which Labour dropped this week after a backbench revolt.

Reeves’s team privately acknowledge that the small headroom of less than £10bn she left herself against the forecasts has contributed to the challenges of the past 12 months – but argue that she had little choice given the poor fiscal inheritance left by the Tories.

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The chancellor is widely expected to have to increase taxes in her autumn budget to close the gap created by U-turns on disability benefits and the winter fuel allowance, and because of the prospect of weaker economic forecasts.

She insisted she was “cracking on with the job” on Thursday, after a tumultuous day on Wednesday in which bond markets dumped UK government debt amid speculation about the chancellor’s future.

Creating an additional £20bn of fiscal headroom, as Bean suggested, would require tax rises equivalent to 2p on the basic and higher rates of income tax.

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