Britain’s Broken Budgets

Ahead of Rachel Reeves’ second Budget later this week, new analysis from the Centre for Policy Studies argues we need to do away with our current system of fiscal rules as they have failed to improve the public finances since their introduction in 1997.

‘Britain’s Broken Budgets’ by CPS Head of Fiscal and Economic Policy Daniel Herring highlights the futility of long-term forecasting and calls into question the value of using it to underwrite any government’s fiscal rules.

The Office for Budget Responsibility’s (OBR) database of historical forecasts shows that, out of 54 medium-term forecasts from 1990 to 2019, actual managed expenditure was always above what was forecast. There was not a single example of the Government spending less than it originally forecast.

The briefing sets out five key reasons why our current system of fiscal rules does not work:

1. They embed ‘deficit bias’, meaning that while Chancellors are happy to run deficits during a downturn, they are unwilling to run a surplus when economic times are better
2. Hard decisions are put off, with loose fiscal policy in the early years of the forecast ‘paid for’ by spending cuts in future years that Chancellors have no intention of actually delivering
3. Policy is designed specifically to meet the fiscal rules, rather than what is most optimal for economic growth
4. The rules are based on a forecasting exercise that is, by its nature, hopelessly inaccurate – most recently obsessing about £14 billion of ‘headroom’ on a £1.5 trillion budget, five years out
5. By focusing solely on the next few years, the fiscal rules fail to take account of Britain’s long-term position – in particular, the cavernous gap that is set to open up between spending and revenue