The UK government is considering having the public finances formally assessed only once a year following a suggestion from the International Monetary Fund (IMF).
The global economic watchdog said the change could avoid “overly frequent” switches in policy to meet the government’s borrowing rules.
The UK’s independent forecaster – the Office for Budget Responsibility (OBR) – currently assesses if the government is on course to meet its limits on borrowing twice a year.
This year, changes in the OBR’s forecast led to Chancellor Rachel Reeves announcing £5bn in health-related welfare cuts, although these were then reversed after a Labour backbench revolt last month.
The influential IMF, as part of its annual health check of the UK economy, said the best solution would be for the government to allow greater room for manoeuvre around its fiscal rules, “so that small changes in the outlook do not compromise assessments of rule compliance”.
Fiscal rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets, which governments depend on to borrow money.
The IMF, in general, praised the UK economy and recent “bold agenda” of pro-growth reforms, saying its medium-term borrowing plans were “credible” and that the UK’s trade deals meant it was well placed to ride out current global uncertainties.
But it said risks to the government’s strategy must be “carefully managed” in a nod to the relatively small buffer that the UK has to deal with shocks to the economy.
“Fiscal rules could easily be breached if growth disappoints or interest rate shocks materialise,” the IMF said.
To head off this possibility, it suggested the government should consider replacing the state pension triple lock , widening the applicability of VAT, means-testing more benefits, and co-payments for richer users of the NHS.
The fact the IMF’s suggestion of cutting the number of assessments is under consideration by the government is an implicit admission that the current policy of having two a year has created a dynamic of constantly having to change policies to meet targets.
The advice from the IMF, if followed, could mean more tax rises than expected at the Budget in the autumn, as the chancellor rebuilds a bigger financial buffer to deal with a volatile global economy.
In response to the IMF’s report, Treasury officials said the government was “committed to meeting its non-negotiable fiscal rules” and added that it welcomed and would consider the watchdog’s “recommendations to further support policy stability”.
The Institute for Fiscal Studies recently recommended downplaying the Spring Statement with a looser borrowing target, to prevent the need for constant fiddling of tax and spend plans.
The chancellor is following two main rules for government finances. They are:
- day-to-day government costs to be paid for by tax income, rather than borrowing
- debt to be falling as a share of national income by the end of this parliament in 2029-30
Responding to the IMF’s report, Reeves said: “Today’s IMF report confirms that the choices we’ve taken have ensured Britain’s economic recovery is underway, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds.
“Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal.”
