UK Chancellor Rachel Reeves’ spring statement showcased an adherence to existing fiscal rules, raising questions about the long-term strategic vision for the economy and public finances. While the chancellor’s measures focused on fixing the country’s tight public finances, the fiscal headroom remains unchanged.
The government’s non-negotiable commitment to its fiscal rules suggests a cautious approach, prioritising short-term compliance over transformative investments. The current fiscal rules state that the government’s day-to-day budget should be in a surplus and that the public sector net financial liabilities should be falling by the 2029/30 fiscal year.
The announcement of fiscal measures, such as an additional £13bn allocated for capital spending and a £2.2bn increase in defence funding, along with welfare and planning reforms, support the government’s desire to enhance public sector productivity and improve services for working citizens. However, the big announcements were the £4.8bn cuts to welfare payments and £3.6bn reductions to departmental spending, which aimed to maintain the fiscal headroom and secured the compliance with the fiscal targets. According to analysis by the Resolution Foundation, these cuts could result in lower-income households becoming £500 a year poorer over the parliament.
Fiscal challenges across Europe
An OMFIF event with the Office for Budget Responsibility on the UK economic outlook touched upon the challenging scenario that the UK is now facing. Although the economy should see recoveries by 2026, it is in a fragile state, and it would take very little change in the fiscal outlook to lose the headroom right now.
The most recent forecast for the UK economy was plagued by US President Donald Trump’s tariffs and disruption of the trading environment, increase in defence spending across Europe following Trump’s softening towards Russia and criticism of Nato, the modest growth in the UK economy and the business concerns around taxes and wage increases.
European governments are facing similar fiscal challenges. The looming fiscal crisis, characterised by slower productivity growth and growing expenditure pressures, necessitates re-evaluating public spending approaches. In Germany, for example, the government announced a massive fiscal package, with a €1tn spending plan for military and infrastructure, that includes easing the borrowing rules to allow higher spending on defence. But this has led to a surge in the euro area government borrowing costs, which can intensify debt pressures.
On the other side of the Atlantic, the US Department of Government Efficiency set a goal of $1tn in deficit reduction by financial year 2026. However, due to legal and procedural obstacles, what it can actually achieve in terms of cutting government spending is likely to be far less than that.
Most importantly, these goals miss a key focus on the outcome of spending plans. The long-term fiscal projections around the globe indicate escalating deficits and public debt levels, highlighting the urgency for reforms that prioritise sustainable and impactful investments. Without a clear framework on how spending can be done more effectively, economies will remain weak, public debt will remain under pressure and economic growth will stay stagnant.
Looking for fiscal alternatives
OMFIF and EY have previously emphasised the necessity for governments to rethink public spending frameworks. ‘The future of public money’ advocates for integrating long-term considerations into fiscal policy, adopting new fiscal frameworks and leveraging technology to enhance public finance management.
The intended and actual outcomes for the real economy should be at the centre of the spending allocation decision, rather than solely focusing on their impact on revenues, expenditures and debt. Addressing short-term thinking in budget decisions is key to ensuring valuable public investment and long-term economic growth. This would involve changing the fiscal objectives that traditionally focus on public debt and budget targets and incorporating other measures such as intertemporal public sector net worth into policy decisions. These recommendations are particularly relevant as governments worldwide grapple with constrained public finances and increasing demands on expenditure due to factors such as ageing populations, climate change and infrastructure needs.​
While the UK’s spring statement introduces measures aimed at enhancing public sector productivity and services, the adherence to existing fiscal rules raises concerns about the government’s long-term strategic vision. The current economic landscape, marked by external trade pressures and tricky geopolitical movements, calls for a more ambitious and forward-thinking approach to public spending.
At a pivotal moment for governments around the world, the forthcoming OMFIF-EY ‘The future of public money: investing in public value’ roundtable presents an opportunity to explore innovative strategies for redirecting public funds towards investments that deliver substantial public value, ensuring fiscal sustainability and societal well-being in the years to come.
Andrea Correa is Senior Economist, Economic and Monetary Policy Institute, OMFIF.
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Image source: UK Treasury