The former Bank of England deputy governor Charlie Bean has warned the chancellor against making kneejerk cuts in next week’s spring statement to try to hit fiscal targets that are five years away.
Rachel Reeves is preparing to slash spending, including on disability benefits, in response to weaker forecasts from the independent Office for Budget Responsibility (OBR) – prompting a backlash from within her own party.
But Bean – who is also a former member of the OBR’s budget responsibility committee, which agrees the forecasts – warned the chancellor against “fine-tuning”.
“We’ve got ourselves into a frankly pretty ridiculous position where we’re doing fiscal fine-tuning to control the OBR forecast five years ahead,” Bean told an event hosted by the Resolution Foundation thinktank on Monday.
“The OBR forecast embodies all sorts of adjustments, judgments – it’s pretty flaky,” he said. “People who do the forecasts understand the uncertainty.”
He added: “I think we want to get away from this idea that we continually have to be neurotically changing taxes and spending to try and control this OBR forecast so that it’s hitting our target.”
Reeves has repeatedly insisted her fiscal rules are “non-negotiable”. The chancellor had previously committed to holding only one budget a year, but recent moves in interest rates are likely to have wiped out the £10bn headroom she left herself against her targets at the autumn budget. As a result, she is now expected to announce spending cuts on 26 March.
Speaking at the same event, Gemma Tetlow, the chief economist at the Institute for Government thinktank, agreed that Reeves should wait and see before changing course.
“I would urge her against the temptation to immediately rush into making policy to try and restore that headroom,” Tetlow said.
She acknowledged the risk that bond investors could react negatively, potentially driving up interest rates on the government’s debt, if the chancellor fails to make clear that she is determined to balance the books.
But she added: “It feels to me that market players shouldn’t be terribly reassured by a chancellor reaching for little bits and pieces to try and get the numbers to just about add up this time, as opposed to standing up [and] saying: ‘If things still look like this in the autumn, we are committed to getting ourselves back on track.’”
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Bean suggested that if Reeves is determined to take some action next week, she could announce that she is prepared to extend the freeze on income tax thresholds for another two years, to 2029-2030, should it prove necessary.
“You don’t have to say: ‘This is something that’s now written into policy.’ You say: ‘This is my contingency, I’ll pull the lever on it if I need to.’”
On the package of welfare cuts, which is expected to trim £5bn-£6bn off spending, Bean said that starting from a savings target was the wrong way to reform the system.
“I happen to think that it should be a priority for the government to try and get those people on disability [benefit] who want to work back into work,” he said, adding that the government should be “thinking what’s the right way to do that, instead of thinking what we’ve got to do is deliver £5bn-worth of savings”.
