IEA - Chancellor should tread carefully on fiscal rule changes

Julian Jessop, Economic Fellow and the Institute of Economic Affairs comments on reports that the Chancellor is planning to change the way in which public debt is measured to allow for more borrowing within existing fiscal rules

“The fiscal rules are essentially arbitrary anyway and there is a good case for excluding the temporary impact of Bank of England losses on the profile for debt. Many independent economists have backed this change and, in isolation, it would be unlikely to worry the markets.

“Nonetheless, the new Chancellor still needs to tread carefully. Even if consistent with a revised fiscal rule, additional borrowing will add to the debt interest bill and could crowd out investment by the private sector. This could also be seen as another U-turn by Rachel Reeves, who has previously said that she does not intend to change the debt rule.

“Much will also depend on what the additional borrowing is for - and what the alternatives might be. Additional borrowing for investment is one thing and might make more sense than raising taxes even further. However, it would still be better to focus on boosting public sector productivity rather than borrowing even more.”