LONDON: The United Kingdom should replace its simple pass-fail approach to fiscal rules with a broader “traffic lights” system to end the “dysfunctional policy making” of recent years, the Institute of Fiscal Studies says.
In a paper calling for the current system to be overhauled, the think tank argued it was time to end the “aggressive gaming” of targets by government and take the political pressure off the Office for Budget Responsibility (OBR). The reforms would call time on arrangements under which the budget watchdog estimates the margin the government has against its fiscal rules.
The IFS said an “obsession” with the so-called headroom has led to a perception that the OBR “is de facto setting government policy” via its forecasts.
“Moving to a broader set of fiscal indicators, assessed according to a traffic light system, would provide a better picture of the government’s overall fiscal position, and reduce the incentive for governments to contort policy in pursuit of a particular ‘headroom’ number,” said Ben Zaranko, associate director of the IFS.
Chancellor of the Exchequer Rachel Reeves twice last year had fill a hole in the public finances after moves in bond markets and forecast revisions wiped out the slim £9.9bil (US$13.4bil) buffer set aside against her main rule that taxes must cover day-to-day spending in 2029 to 2030.
The resulting policy uncertainty deterred businesses from investing, troubled markets and put the OBR in the political firing line as Reeves imposed billions of pounds of tax rises now blamed for holding back growth. — Bloomberg
