No set of fiscal rules or fiscal institutions will ever be perfect. And even if they are good in theory, the way they operate and interact with things like public opinion and market sentiment may well make them less than optimal in practice.
So it’s important that we keep questioning them, and asking whether they are helping deliver the outcomes we all want. It was good therefore to attend a wide-ranging discussion on these issues at a roundtable yesterday hosted by the Economic Change Unit.
In the same spirit, today we’re publishing our evidence to the Lords Economic Committee, (originally submitted in December 2025), which sets out several ways to improve the current approach. It is certainly unhelpful for economic policymaking and debate to focus narrowly on measures of fiscal headroom, rather than on the broader goals of sound economic policy — such as growth, stable inflation, employment, and equality.
Our suggestions revolve around moving away from fixed numeric targets towards more judgement-based decisions, allowing greater flexibility and responsiveness to the economic cycle, and reducing the tendency to fixate on short-term fiscal headroom. We also suggest creating a distinct ‘preventative’ category of spending, with the fiscal rules targeting a balanced budget in the current spending category, potentially excluding those prevention budgets. And finally, we call for greater fiscal devolution so not all the strain is being taken by the centre.
The debt problem
It is important to note, however, that many of the issues around UK macroeconomic policy today are less about these ‘designed’ rules and institutions, and more to do with specific political and economic realities.
The 2008 Financial Crisis, the Covid Pandemic, the Ukraine war, and the austerity policies that hollowed out public services and led to poor economic growth, have all meant the UK has accumulated a significant amount of debt, especially in relation to GDP. On top of this, the interest rates we have to pay on that debt are high. According to the OBR, in 2025-26 debt interest spending is likely to be £111.2 billion – representing 8.3 per cent of total public spending.
This also means that the markets are nervous. If the UK is forced to borrow a large amount, then these are the guys we’re borrowing from – and, like it or not, if they feel that the government has lost interest in this element of economic policy, it will make borrowing significantly harder. That’s why anyone calling for more government borrowing needs to show their workings.
Of course, this can be very frustrating. Many feel that strong public investments now will pay off in the future – including in terms of economic growth. They become furious if the OBR does not instantly raise its growth forecasts when such policies are floated or announced. There is something to be said for this, and it has been good to see the OBR trying to accommodate more of this feeling in their work.
But consider this: as an OBR expert, all you have to go on is the announcement of £X billion over Y years investment in, say, infrastructure or skills. At this point you don’t know if it will actually happen; you don’t know if it will be done well (think HS2 and innumerable failed skill plans); and you don’t really know what impact it will have on growth and over what time period – even if it happens and it’s done well. So should you really put major increases in growth into your forecast as a result? Markets will feel that same nervousness.
Take back control?
Some argue that politicians should drag back more power on economic policy from independent institutions like the Monetary Policy Committee or the OBR. What’s the point of asking the public to vote for change, they say, if these independent bodies actually decide everything?
Maybe there is some truth in that. But these institutions were set up because we believed they would help produce better economic outcomes – and weakening them holds major risks, as Liz Truss so gloriously showed.
Our elected politicians do, of course, set the rules for the MPC and the fiscal rules that the OBR is asked to judge on. They are entitled therefore to change them if they want. But rather than clipping the wings of these institutions entirely, reforming the system could produce better outcomes.
To paraphrase what many have said already, there is nothing particularly progressive about having high borrowing and debt per se. But there is also nothing particularly progressive about sticking to rules that are no longer working. Reforming the system in the way we set out in our Lords Economic Affairs Committee submission may well be the best way forward.
