The House of Lords Economic Affairs Committee has called on Chancellor Rachel Reeves to maintain a "significantly larger" buffer against her fiscal rules, warning that the UK's public debt is on an unsustainable trajectory. The committee's report, titled "Fortifying the Fiscal Framework," criticises both the current government and its predecessors for operating with dangerously low levels of fiscal headroom.
Current Buffer and Historical Context
At last year's budget, Reeves raised taxes to more than double the headroom against her fiscal rules to £22 billion. However, some of this buffer is expected to be eroded by the economic impact of the Iran war. The committee notes that this remains historically low compared to the £30 billion average between 2010 and 2022. "Despite the recent increase in the size of the buffer, it remains at an historically low level and further substantial increases are still required," the report states. "Significantly larger buffers must become the norm."
Criticism of Fiscal Management
The peers criticised successive governments for treating fiscal buffers as "war chests" to be run down to a minimum, leading to destabilising implications for potentially chaotic policy changes. Lord Stewart Wood, the Labour peer who chairs the committee, emphasised that governments have been operating near a "cliff-edge" for too long. The committee includes former Treasury permanent secretary Terry Burns, economist Alison Wolf, and former chancellor Norman Lamont, who stepped down after the inquiry concluded.
Unsustainable Debt Path
The report echoes warnings from the Office for Budget Responsibility (OBR), stating that on current tax and spending settings, the UK is on a path to unsustainable debt levels. It highlights that crises occur frequently enough to make benign projections overly optimistic, pointing to the Middle East conflict as a recent example. The peers call for more attention to the OBR's annual fiscal risks report, including a House of Commons debate led by the chancellor.
Stricter Interpretation of Fiscal Rules
While not recommending a substantial rewrite of the fiscal rules, the committee urges a stricter interpretation of Reeves's second fiscal rule on debt. Currently, the rule requires debt to be falling in the last year of a three-year forecast period, which can be met by tax and spending plans that see debt rise for two years before falling in the third. The peers propose that in normal times, debt in the third year should be lower than in the first year.
OBR's Role and Policy Implementation
The report also addresses criticisms that the OBR is too influential on government policy. It suggests that governments should feel free to implement policies even if the OBR declines to score them as economically beneficial. "Something has gone wrong with the policymaking process if the OBR's decision not to score a policy determines that it will not be taken forward when the government believes it to be valuable," the report finds.
A Treasury spokesperson responded: "The UK has one of the most robust fiscal frameworks in the world which helps maintain economic stability while unlocking £120bn of investment in our future infrastructure with disciplined day-to-day spending." The Treasury is currently recruiting a successor to former OBR chair Richard Hughes, who resigned after last year's budget details were inadvertently published early. The upcoming autumn budget is expected to be tough, with the Middle East conflict likely to depress economic growth.
