The Spring Statement Demonstrated The Wrong Way To Make Policy

4 min read29 March

The Chancellor's unwavering commitment to her fiscal rules is understandable. But the Spring Statement didn't need to happen like this, argues the Institute for Government's Thomas Pope

The Spring Statement on Wednesday was supposed to be a non-event. When the Chancellor announced her new fiscal timetable last October, this was to be just a forecast update, with any policy action reserved for a budget in the Autumn.

But a downgrade to the growth outlook and an increase in government borrowing costs meant Rachel Reeves would – just – have been on course to miss her fiscal rules if she didn’t find some savings. She clearly wasn’t willing to let that happen, having doubled down on her commitment to her ‘ironclad’ rules. No matter that she would have only been on course to miss her rule by less than £1bn, a tiny number in the context of government spending and receipts that each exceed £1 trillion.

Looking at a slew of negative headlines on Thursday, Reeves must have been wondering if this fiscal event was worth it.

This was not a major event, announcing spending cuts of less than £10bn in the final year of the forecast and no tax policy. What Reeves announced has not changed the state of the public finances in any meaningful way. She restored the margin of error against her main fiscal rule to £9.9bn – exactly the same headroom she had at the Budget. But that also means another normal-sized forecast revision by the Office for Budget Responsibility (OBR) would require another bout of tax increases or spending cuts in the Autumn.

At the same time, the decision to turn the forecast update into a statement was highly disruptive to government policymaking. Last week’s ‘Pathways to Work’ Green Paper, outlining plans to overhaul disability benefits, was rushed out to allow Reeves to score those cuts. This was done in such a hurry that the OBR did not have time to fully review the costings or incorporate them into the economic forecast. Last-minute disagreements over how much the measures would save led to the government announcing additional cuts so that the numbers added up.

Holding fire on policy this time would have marked a welcome break with previous chancellors

This is exactly the wrong way to be making complex policy changes, tweaking policy to hit a precise number in an uncertain and inevitably changeable forecast. These changes will have a big financial impact on those affected and – the government is hoping – a big effect on how many people who might otherwise have received these benefits will instead find work. It is much more important that the government gets the reforms right, finding the right balance between changing incentives and supporting people to get into work, even if this meant the policies could not be scored until the Autumn.

Policy-making episodes like this, and the temptation that additional fiscal events provide for chancellors to announce more policy, are big reasons why the Chancellor was right to commit to holding only one major fiscal event per year. A slower pace of policy development is entirely in keeping with Reeves’ commitment to stability as a core foundation for growth. And holding fire on policy this time would have marked a welcome break with previous chancellors who have undermined their long-term strategy by chasing short-term political gain through two fiscal events a year.

Reeves might argue that she was left with no choice but to act. Although she would only have been on course to breach her fiscal rules by a tiny margin, a miss is a miss. The UK is planning to issue over £1 trillion of debt over the next five years, so spooking investors even a bit, leading to even a small increase in interest rates, would have a big effect on public finances. Financial markets seemed sanguine in the wake of Reeves’s announcements. She has demonstrated a commitment to her rules that perhaps government lenders have found reassuring.

But was this statement really necessary to placate those financial market players?

The Chancellor could have stood up, emphasised her commitment to her fiscal rules and promised to address any deficit at the budget if required. She could even have highlighted that work was in train to save money from the welfare bill, and that full details would be announced later in the year. This would have avoided the disruptive welfare policy process, and also set a clear precedent that the chancellor will not react in as short-termist a way as her predecessors.

We cannot know how markets, the media and the public would have reacted to this approach not taken, but when the dust settles, Reeves may well conclude that this was a Spring Statement she didn’t need to make.