The UK government’s finances should be assessed only once a year to avoid “overly frequent” changes to policy, the International Monetary Fund (IMF) has suggested.
At the moment, the government’s independent forecaster – the Office for Budget Responsibility (OBR) – has to produce two forecasts a year for the economy and public finances, and to assess if the government is on course to meet its limits on borrowing.
This year changes in its forecast for the economy, driven by rises in global and domestic government borrowing rates, led to Chancellor Rachel Reeves announcing £5bn in health-related welfare cuts.
However, the cuts 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 financial targets, “so that small changes in the outlook do not compromise assessments of rule compliance”.
The advice, if followed, could mean more tax rises than expected at the Budget in Autumn, as the chancellor rebuilds a bigger financial buffer to deal with a volatile global economy.
The government is considering a change that would help support its move to there being a single Budget every year, a move which was designed to increase policy stability.
The fact the IMF’s suggestion is under consideration is an implicit admission by the Treasury that the current policy of having two assessments per year has created a dynamic of constantly having to change policies to meet targets.
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, which she has repeatedly said are “non-negotiable”. 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
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.
It suggested that should economic shocks materialise, 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.
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.”