Think Tank Delivers Scathing Verdict on Chancellor's Fiscal Framework
Chancellor Rachel Reeves has received a blistering assessment of her economic policy from one of Britain's most respected think tanks, with economists at the Institute for Fiscal Studies (IFS) declaring her fiscal rules "dysfunctional" and damaging to the economy. The critique comes just weeks before Reeves is set to deliver her pivotal Spring Statement, where she faces mounting pressure to overhaul her self-imposed fiscal constraints.
The Speedometer Analogy: A Flawed Focus
In a striking analogy, IFS economist Ben Zaranko compared the Chancellor's approach to a driver who fixates solely on the speedometer while ignoring critical road conditions, traffic, weather, and vehicle state. "You cannot assess whether you are driving safely solely by looking at the speedometer," Zaranko wrote, emphasizing that the current framework's obsession with 'fiscal headroom'—the margin by which the government meets its rules based on forecasts—leads to "spurious" policy changes and increased economic volatility.
"This framework is achieving neither sustainable public finances nor credibility with financial markets," Zaranko stated unequivocally. "We are in a bad equilibrium." The report contends that the UK's fiscal framework possesses some desirable features but ultimately fails to deliver positive outcomes, creating a cycle of dysfunction that demands immediate correction.
The Non-Negotiable Rules Under Fire
Reeves' fiscal rules, which she has consistently described as "non-negotiable," prevent the government from borrowing to fund day-to-day spending and mandate that debt must fall as a percentage of GDP by the 2029/30 fiscal year. The IFS argues this rigid structure "all but guarantees policy adjustments in response to small changes in the forecast," effectively mainlining macroeconomic volatility into policy volatility and unnecessarily heightening economic uncertainty.
"The current set-up... does not make for good policy-making, it does not ensure sustainable public finances, and it stretches credulity and credibility with financial markets," the think tank concluded. This criticism follows recent tensions over economic forecasts ahead of the 2025 Autumn Budget, where Reeves faced accusations of "misleading the country" after hinting at a downgrade that never materialized.
Proposed Radical Overhaul and Treasury Response
The IFS is calling for a radical reform to be implemented in the post-2029 Parliament. Their proposal includes:
- The Chancellor delivering a high-profile speech outlining broad fiscal objectives in narrative terms rather than fixed numerical targets
- The Treasury selecting eight to ten key indicators for the Office for Budget Responsibility to monitor
- The OBR assigning red-amber-green status to these indicators based on clearly defined thresholds
This approach, the think tank argues, would move beyond the current "dysfunctional" equilibrium. Meanwhile, the Treasury maintains its defense of the existing framework. A spokesperson stated: "The government's non-negotiable fiscal rules help to keep interest rates low while also prioritizing investment to support long-term growth. In the Budget, we doubled the fiscal headroom, and we are cutting borrowing more than any other G7 country with borrowing forecast to be the lowest in six years as share of GDP."
Spring Statement Looms Amid Growing Pressure
With the Spring Statement approaching, reports suggest Reeves will use the event to reinforce Labour's pledge of holding only one major fiscal event per year. The Treasury aims to restore confidence through stability, avoiding drastic policy or spending changes according to Telegraph reports. However, the IFS assessment creates significant pressure on the Chancellor to reconsider her unwavering commitment to the current rules, particularly as economists warn they are "hammering" the broader economy through increased volatility and uncertainty.
The think tank's intervention highlights the delicate balance Reeves must strike between maintaining fiscal discipline and responding to expert criticism that her framework may be causing more harm than good. As the Spring Statement nears, all eyes will be on whether the Chancellor adjusts her course or doubles down on what the IFS characterizes as a fundamentally flawed approach to economic management.
