The Budget for Fiscal Headroom
Summary
​
-
Half of the panel believed that the government’s medium-term deficit-reduction plan is not very credible. Around two fifths of panellists thought the plan is somewhat credible and 10% (two panellists) believed it to be not at all credible.
-
On average, panellists attributed an 83% probability to the debt-to-GDP ratio being higher than its current level of 95% by 2029/30. They attributed just a 17% probability to it dropping below its current level by 2029/30.
-
A large majority (81%) of the panel either agreed or strongly agreed that the current fiscal rules encourage short-term, piecemeal policies over comprehensive reforms for long-run growth.
Question 1: In light of the November Budget, how credible do you judge the government’s medium-term deficit-reduction plan?​​​​​​​​​​
Twenty-one panellists responded to this question. 52% of the panel thought that the government’s medium-term deficit-reduction plan is not very credible. 38% of panellists thought the plan is somewhat credible . Two panellists believed it to be not at all credible. No panellists thought the plan is “very credible”.
The panel highlighted that the credibility of deficit reduction is weakened by the schedule of Budget measures. Nicholas Oulton (LSE) stated that “tax rises are back-loaded, so their credibility is weak”. David Aikman (NIESR) commented that the fiscal outlook is “contingent on a notably optimistic path for tax receipts in the final years of the forecast”.
Commenting on the uncertainty of the forecast, Costas Milas (University of Liverpool) argued that markets and governments have settled on the “convenient but nevertheless false” compromise that fiscal headroom is predictable. Michael Wickens (University of York) echoed this sentiment, stating that projections of the fiscal rules are “fraught with uncertainty”.
​
​Question 2: The current debt-to-GDP ratio is 95%. Please assign probabilities (summing to 100%) to the debt-to-GDP ratio in 2029–30 falling in each of the following ranges:  (a) below 95%; (b) between 95% and 100%; (c) above 100%?
Twenty-one panellists responded to this question. On average, panellists attributed a 17% probability to the debt-to-GDP ratio being below 95%, a 45% probability to it being between 95% and 100%, and a 38% probability to it being above 100% by 2029/30.
Question 3: The UK’s current fiscal rules encourage Chancellors to prioritise short-term, piecemeal tax and spending measures over comprehensive reforms that could boost long-term growth.
Twenty-one panellists responded to this question. A large majority (81%) either agreed or strongly agreed that the current fiscal rules encourage short-term policymaking: 43% agreed and 38% strongly agreed. 14% disagreed with the statement while 5% neither agreed nor disagreed. No panellists strongly disagreed with the statement.
Panellists raised concerns about the practical implications of the fiscal rules, particularly against a small margin of headroom. Michael McMahon (University of Oxford) noted that operating with a small fiscal buffer means that “downward adjustments to the (highly uncertain) economic outlook exert a large pressure on fiscal response”. Charles Bean (LSE) criticised the treatment of the fiscal mandate as a “hard cliff edge” against the OBR forecast, suggesting that this has led to the “neurotic fine-tuning of fiscal decisions”, which he argued is exacerbated when accompanied by a small buffer. James Smith (Resolution Foundation) commented that it is not the fiscal rules per se, but rather “a confluence of inadequate headroom; manifesto commitments on tax; and perceived political constraints” that has encouraged the government to take a piecemeal approach.
The panel also suggested that the fiscal rules shift emphasis away from growth-enhancing policies. Michael McMahon (University of Oxford) argued that fiscal measures that markedly shift the growth outlook are “few and far between, and uncertain in their impact, making growth-enhancing budgets hard to guarantee”. Michael Wickens (University of York) argued that “the fiscal rules have little to do with stimulating growth”, and that instead of paying for its expenditures by increasing tax rates, the government should aim for higher tax revenues through economic growth. Charles Bean (LSE) suggested that the government “tends to be overly focused on how many £ billions a putative measure yields or costs in the target year, rather than on the associated economic and social costs and benefits in the round. This has inhibited the pursuit of a clear and coherent strategy for public spending and the tax system”.