Ditch fiscal rules to save ‘dysfunctional’ Britain, Treasury urged

Eir Nolsoe

Thu, February 19, 2026 at 3:44 PM GMT+9 4 min read

The IFS’s proposal comes after chaotic speculation in the run-up to Rachel Reeves’s Budget - PA/House of Commons

The next chancellor must scrap fiscal rules to end Britain’s economic “dysfunction”, the Institute for Fiscal Studies (IFS) has said.

The think tank said the Treasury must break free of the “obsession” with Budget headroom dictated by five-year forecasts for the UK’s £2.8tn economy.

Ben Zaranko, from the IFS, said: “The question of whether the Government’s fiscal policy is sustainable or not cannot be boiled down to a single number.”

He added: “Because they’ve typically been expressed on a rolling basis and sometimes only looking five years ahead, it’s just been too easy to meet the rules by sounding tough without actually being tough.

“It has allowed the Government to claim that it’s behaving responsibly because it’s got all this headroom, but really the underlying fiscal picture is much weaker.”

The verdict is politically difficult for Rachel Reeves, the Chancellor, who has insisted that her fiscal rules underpin economic stability and are “iron clad”.

It may also bolster MPs who are calling for the Chancellor to relax the fiscal rules to fund more spending on defence.

Chancellors have relied on fiscal rules to steer Britain’s economy since 1997. They are effectively self-imposed guardrails to guide public spending.

When Ms Reeves entered No 11, she introduced two key rules.

The first dictates that day-to-day spending must be paid for with tax receipts, so the Government can only borrow to invest.

The second stipulates that Ms Reeves must reduce net financial debt as a share of GDP, to keep debt on a “sustainable path”.

However, the IFS said “aggressive” gaming of the rolling targets over decades had undermined their credibility.

Speculation hurts economy

The IFS’s proposal to scrap the targets comes after chaotic speculation in the run-up to Ms Reeves’ autumn Budget.

Ms Reeves only had £9.9bn headroom with which to meet her fiscal rules at her Spring Statement last year, a figure described as “wafer-thin” given the size of the overall UK economy.

This meant small fluctuations in the Government’s borrowing costs and judgments by the OBR on productivity could significantly alter the need for tax rises and spending cuts.

She has subsequently increased this buffer to £22bn by introducing large tax rises.

The IFS is proposing that whoever is chancellor after the next general election should adopt an entirely different system for assessing whether their fiscal policy is sustainable.

The think tank suggested that the Treasury should essentially adopt a “traffic-light system”, where it monitors between eight and ten measures and classes the outlook as red, orange or green.

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Fiscal rules under fire from Left and Right

The recommendation comes after widespread criticism of fiscal rules and the role of the OBR from people on both the Left and Right.

Andy Burnham, the Mayor of Greater Manchester, has accused Ms Reeves of being “in hock to the bond markets”.

He subsequently insisted that he was blaming decisions by “politicians from the 1980s onwards” – such as privatising water and energy.

Andy Burnham has previously said that Labour should not be ‘in hock’ to the whims of investors - Jordan Pettitt/PA

Louise Haigh, the former transport minister, has also railed against the “unaccountable orthodoxy of the OBR”, urging Labour to rewrite “the rules that bind us”.

However, Mr Zaranko warned: “I want to be very clear that this is not about giving an excuse to borrow more or allowing the Government to relax the constraints it’s under.”

Should politicians take note of the IFS’s proposal, it may fall on Reform to implement it. The party is polling at 24pc, with Labour at 19pc.

Mr Zaranko said “the dream outcome” would be to have cross-party agreement on the framework, which he says is flexible enough that different parties could make it their own.

“Reform might want to pick a very different set of objectives and indicators than would a Labour government.

“Reform are talking about wanting to reduce public sector pension liabilities. That’s something that currently sits outside of government debt and is a risk we have on the balance sheet that doesn’t normally get much attention. You could put that as an indicator.”

“The Tories have talked about wanting to limit public spending growth. You could put that in directly as one of these indicators.”

These could form part of a new traffic-light system, with the Treasury setting the parameters for red, orange and green – defining whether, for example, debt or welfare spending is on a sustainable course.

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