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The House of Lords Economic Affairs Committee has today published its report, ‘Fortifying the fiscal framework’.

• Report: Fortifying the fiscal framework (HTML)
• Report: Fortifying the fiscal framework (PDF)
• Inquiry: The UK’s fiscal framework
• Economic Affairs Committee

Overview

The fiscal framework is a central element of the UK’s approach to fiscal policy. Two of the most important elements of this framework are the fiscal rules and the Office for Budget Responsibility (OBR). Their purpose is to support fiscal discipline, enhance transparency and reassure markets about the future path of government debt.

The current fiscal rules have retained a notable flaw from their predecessors: by requiring that debt must be falling by the third year of a rolling forecast, the supplementary target can still be met by promises of policy action which are never fulfilled and so debt ultimately continue to trend upward. Whilst the committee recognises and welcomes that the move to a three-year rolling target from a five-year target means the Government is required to be clearer in its plans for deficit reduction, this is still insufficient. Although no rule can guarantee such reduction, this is still a built-in deficiency of the current rules.

There is also an excessive focus on the short-term rule compliance and insufficient attention paid to the longer-term trends. The main reason to care about whether the Government is complying with the rules is the intended effect that this will have on the longer-term debt dynamics faced by the UK.

There has also been a recent increase in unhelpful rhetoric from across the political spectrum that describes the OBR as policing Government policy. This is misguided and based on a fundamental misdescription of the OBR’s work. It is an independent and impartial referee that assesses the Government’s compliance with its own self-imposed rules. The Government is free to disagree with its assessment and set policy accordingly.

On current tax and spending settings, the UK is on a path to unsustainable debt levels. These issues should be of paramount concern for the Government, not least because the last few decades have repeatedly shown that crises occur sufficiently often that benign projections prove overly optimistic. For debt to be placed on a sustainable footing it must in normal times be falling so that the country is well placed to respond to crises.

Key recommendations

The committee’s key findings and conclusions include:

• The current fiscal rules can be met without any actual reduction in debt being achieved over the long term. The Government should set out an additional commitment such that in normal times debt in the third year is lower than in the first year. This will add credibility to the existing target.
• When the Government operates with a small fiscal buffer, the potential for non-compliance with the fiscal rules increases, leading in turn to speculation about policy measures to ensure compliance; this encourages a pre-occupation with the headroom figure itself. The Government should commit to operating with substantially larger buffers that reflect the unavoidable forecast errors in the OBR’s projections used to assess compliance with the fiscal rules.
• Repeated changes to the fiscal rules over the years have undermined the credibility of the fiscal framework and irrespective of their merits, further modifications must be seriously considered within this context. Changes to existing fiscal rules should be formulated as part of a concerted, in-depth consultation exercise conducted in a period where there is no formal political campaigning.
•  The OBR is a valuable component of the UK’s fiscal framework as it substantially enhances the transparency of fiscal policy. Descriptions of the OBR policing or constraining government policy are misguided. They merely monitor compliance with the Government’s self-imposed rules. And concerns that the OBR does not adequately recognise the impact of various policies are equally misplaced. If the Government believes in the value of certain policies, it is free to implement them irrespective of whether the OBR scores them. If they are indeed beneficial, the positive effects will be registered in future projections by the OBR.
• Further, in line with international best practice, the OBR should continue to carry out two forecasts per year but the Government should change the timing of the Spring forecast so that the length of time between the two forecast events is closer to six months.  This would reduce the pressure to announce policy in the Spring Statement when there is more than six months until the Budget.

Chair's comments

Lord Wood of Anfield, Chair of the House of Lords Economic Affairs Committee, said:

“The UK’s fiscal framework is frail. The Government’s behaviour must change with significantly larger fiscal buffers becoming the norm and these buffers not being used as a piggy bank that can be ‘raided’.

“We want the Government to boost the credibility of the existing debt target by the setting out of an additional debt target which will show cumulative performance of three years.

“The frequency with which fiscal rules are changed have simply compounded the problem. If the Government were ever to change the rules, it should do so following a consultation that would allow the costs and benefits of alternatives to be properly considered.”

Further information

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