Top economists are calling on Rachel Reeves to bend her fiscal rules or consider raising taxes, rather than making cuts to welfare in her upcoming spring statement.
With the Office for Budget Responsibility (OBR) expected to revise down its UK forecasts on 26 March, the Chancellor’s room to manoeuvre is shrinking. Treasury sources suggest Reeves plans to respond with spending cuts, including to welfare, despite growing opposition within her own party.
A tough call on fiscal rules
Reeves’s fiscal rules allow borrowing for investment but require balancing day-to-day spending with tax receipts. One rule also aims to reduce public debt by the end of the forecast period. However, some economists argue that sticking to these rules in today’s climate could harm the economy.
David Blanchflower, a former Bank of England policymaker, believes there are alternatives. “In a world full of uncertainty, you want to loosen your grip on the fiscal rules and focus on what really matters,” he said.
Blanchflower, alongside others, supported Reeves’s growth policies before last year’s general election, but now suggests flexibility is key.
Defence spending creates a dilemma
The growing need for national defence spending is adding to the pressure. Keir Starmer recently pledged to increase defence spending to 2.5% of GDP by 2027, a move that some see as incompatible with Reeves’s fiscal rules.
Starmer has promised further increases, but many economists doubt that this can be done without deep cuts to other areas of public spending.
Michael Jacobs, a former adviser to Gordon Brown, suggests that Reeves may need to exclude defence spending from the rules, as Germany plans to do, or even issue “security bonds” to fund it.
Can tax rises avoid the crunch?
Economists are also pushing for tax increases to help balance the books. Danny Sriskandarajah, CEO of the New Economics Foundation, argues that the fiscal rules are flexible and often change. He believes it’s time for another adjustment.
“Ultimately, taxes will have to rise in the medium term,” he said. “We can’t keep juggling defence, public services, and an ageing population without facing tough decisions.”
Alfie Stirling, chief economist at the Joseph Rowntree Foundation, added: “Something has to give. We’re already seeing huge pressures on public services, and it’s only going to get worse.”
Tax rises: A necessary evil?
Jo Michell, a professor of economics at the University of the West of England, believes more tax rises are inevitable. “It feels like death by a thousand cuts, but the end point remains the same: we’ll need tax increases,” she said.
Not everyone agrees
However, not all experts believe there’s much room for Reeves to manoeuvre. Paul Johnson from the Institute for Fiscal Studies warns that the current fiscal rules are already fairly loose. “We’ve seen how jittery the debt markets are. It’s not an easy situation,” he said.
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