Rachel Reeves Has Made Welcome Moves To Improve Fiscal Policy Making

23rd September 2023

Liz Truss's autumn mini-budget is a lesson in how not to do fiscal policy.

The shadow chancellor has set out an approach to fiscal policy which has long been called for by the Institute for Government but, says Olly Bartrum, a government committed to fiscal policy making could still go further

Shadow chancellor Rachel Reeves has announced a new ‘fiscal lock' to guarantee that the Office for Budget Responsibility (OBR) will publish a forecast to accompany any major decision on tax and spending, with the aim of avoiding the events of last autumn where an apparent disregard for objective evidence led to a loss of faith in the UK's fiscal policy.

However, the more significant change to day-to-day fiscal policy making is likely to come from Labour's commitment to one major fiscal event per year - something the Institute for Fiscal Studies and others have long called for. These would be welcome improvements to the fiscal framework.

Liz Truss's mini-budget demonstrated the risks involved in sidelining the OBR
As we warned (at least twice) in the run up to the mini-budget - and echoed in subsequent commentary - Liz Truss' approach to fiscal policy making, especially sidelining the OBR, was reckless. Whatever the merits of the policies themselves, refusing the OBR’s offer of a forecast fuelled concern about that government’s apparent disdain for independent advice, undermining the credibility of her economic and fiscal policy. This undoubtedly contributed to a sharp rise in the cost of borrowing for the government in the aftermath of the announcement.

The mini-budget also marked the fifth major fiscal announcement of 2022, following on from the spring statement and a series of ad-hoc announcements of energy support throughout the year. While it is legitimate for governments to make fiscal announcements outside of budgets to respond to urgent issues such as the pandemic or energy crisis, the recent trend of having multiple major fiscal events per year is not a good way to do fiscal policy. It creates a large degree of policy uncertainty that is harmful for the economy, consumes a lot of government time, and limits its ability to develop policy well and with a long-term focus in a strategic way and instead creates incentives for ad-hoc tinkering.

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