Fiscal rules are works of fiction. They are as made up as fairy tales are, and yet the Chancellor is asking us to believe that she should manage the economy by complying with them. Why is she so deeply misguided whilst taking us for fools?
The audio version is refusing to embed properly in this post, and so is available on this link instead.
This is the transcript:
There are no such things as fiscal rules.
I know that Rachel Reeves is obsessed with the idea that she must comply with her fiscal rule - and the important word in what I've just said is that it's her fiscal rule because no one else has one.
Literally before 1997, such things as fiscal rules were not heard of in economic discussion.
They did not exist.
They were a non-event.
Nobody was constrained by them.
I cannot emphasise this point enough. They were made up by Ed Balls and Gordon Brown when Labour was elected in 1997 as a way to supposedly emphasise to financial markets that Labour was not going to be irresponsible with public money, as they saw it.
This was the supposed reputation of Labour governments in the period after the Second World War.
It was claimed that Harold Wilson's governments from 1964 to 1970, and then the Wilson - Callahan governments from 1974 to 1979, had been reckless with public money - in particular when Denis Healey had supposedly to go to the IMF to ask for a loan to bail out the Bank of England, which by the way never happened because we did neither need it nor was the loan never granted. But as a consequence, this symbolic gesture of a fiscal rule was created to supposedly pacify the City of London. And like all symbolic gestures, this one has become a millstone around every Chancellor's neck ever since.
Let's be clear, what has happened since then.
There have been no less than five major changes to the fiscal rules since 1997.
From that time when Gordon Brown first introduced these things until 2010, when Labour ceased to be in office after 13 years in government, Gordon Brown's rules were the thing that we followed until they were effectively abandoned in 2008 when the global financial crisis happened. But even they had more than one version.
The first one was called the Golden Rule. It was claimed that in the Golden Rule, the budget would balance over a budget cycle. Quite what balance meant and what a budget cycle meant were slightly nebulous. To put it nicely, everything was supposedly going to work out fine in the end, but when the end was, was actually redefined by Gordon Brown several times during that period.
It didn't work. We ended up with a global financial crisis. If you want evidence that the fiscal rules of that period did not work, then that crisis was it.
We then got George Osborne coming into office in 2010, and his claim was that he would create a Charter for Budget Responsibility, out of which the Office for Budget Responsibility was created. And the claim was that we had something called a structural fiscal deficit. This was a long-term inability to make the books balance because we were habitually spending more than we generated by way of tax, and it was this that Osborne claimed he would eliminate.
In practice, he didn't eliminate this so-called structural deficit for two good reasons. One was there is no such thing as a structural deficit. There's simply a difference between income and expenditure, and the reasons for the difference in income and expenditure change over time, and none of them can be described as structural.
And secondly, whenever he set a target, it became very obvious that he wasn't going to achieve it, so it was revised almost every year from 2010 to 2015. There was no rule in reality as a consequence.
Then Osborne was consigned to history, and from 2015 to 2019, in the aftermath of the collapse of David Cameron's administration and the arrival of Theresa May, we got a new rule, and this one was that we were going to run a budget surplus.
That didn't work. Brexit put paid to that. There was no chance after the Brexit vote that we would ever run a budget surplus. And the rule that supposedly operated from 2015 to 2019 failed as badly as had those of Gordon Brown and George Osborne as the previous Tory Chancellor.
So Philip Hammond came and went, as did Theresa May, and he was replaced by Sajid Javid as Chancellor when Boris Johnson became Prime Minister, and he created an entirely different fiscal rule. This one was an investment-led rule. Supposedly there was to be a 3% cap on investment each year. In other words, only 3% of GDP could be invested by government and the current budget - the difference between income and expenditure for routine regular payments - would balance. That didn't work either. Why? Because Covid came along in 2020 and blew everything apart, and therefore there was no rule left.
And in 2022, we did of course, get the fiasco of Liz Truss when there was no fiscal rule for a few weeks, and her government failed, but not because of the absence of a fiscal rule. Her government failed because the Bank of England killed it by announcing a quantitative tightening at the same time as she announced her disastrous budget in September 2022, and the two together created a budget meltdown. Of the two, in fact, I would blame the Bank of England more.
But we then go on, and we have yet another chancellor who comes up with a fiscal rule, and this is the one that still exists. Quite bizarrely, we have carried on with it even though there's been a change of administration from the Tories to Labour. And the plan now is that over a five year period - as we are back to the longer term, which Gordon Brown once introduced a long time ago - over a five-year period of time, the budget should balance. That's now the requirement. And right now, Rachel Reeves is absolutely unable to prove how her budget will balance over a five-year period. And remember, it's a rolling five-year period, so she's never comparing like with like, but she can't prove that, and therefore her fiscal rule is also failing.
Let's be clear about this.
The history of fiscal rules is dire.
They haven't worked.
They haven't contributed to good budget management.
They have created confusion because they're continuously revised.
They have led to chancellors lying to us incessantly about how they're going to do one thing and then mysteriously revise it within months because they can't achieve their own goals.
And what we end up with is a situation where we are just getting economic nonsense fed to us through the media whilst we end up with the farce of Rachel Reeves saying that people must be punished if they are in poverty because she has to balance her fiscal rule.
We've already had pensioners harmed by the Winter Fuel allowance being withdrawn.
Now we're going to see Personal Independence Payments capped as a consequence of this, and as a result, some people will lose thousands of pounds a year when they are already in poverty and have extra costs because they have disabilities, which impose those additional costs upon them.
All of that just to balance a spreadsheet, which cannot balance because fiscal rules have never worked.
We do have to stand back and say this is not the way to manage government finances. In fact, this is not the way to manage an economy.
If you were going to manage an economy, you would not start with the finances. If you manage a company, you don't start with the cash flow. You don't start with the bank account. What you start with is what are we going to sell? Why are we going to sell it? Who are we going to sell it to? Why will they want to buy it? How will we persuade them to buy it? Will it be of any benefit to them? Will they come back and buy any more? Will this create resilience in our company? Will we, therefore, be able to offer long-term opportunities to people? Will we have a basis for investment? Will we have an opportunity that will continue into the future?
Those are the things that you ask if you run a company, and I know because I've done it.
If you run a country, you should be asking remarkably similar things.
What can we do for the benefit of this country to ensure that its people have long-term prosperity?
How can we ensure that this country can be defended against the threats that might arise against it?
How can we guarantee that those who are at greatest risk in this country are protected from the uncertainties that surround their lives, which ensures, as a result, that they can survive and do better than that and even prosper to some degree?
What are we going to do to manage inequalities?
How are we going to create the environment in which enough people will have enough money to ensure that there will be reasons to invest?
I could go on and on and on, but those questions are about reality.
They are about real things, real people, real activities, things that must be done if people are to live well.
You'd never, ever start with cash.
When you look at government or when you look at finances in a company, you instead look at what you want to achieve. And whilst we continue to have Chancellors whose only concern is with cash flow, we will have inept management of the UK Treasury and we will have inept management of government economic policy, and we will have inept management of our whole economy.
As a consequence, that's what Rachel Reeves is delivering because she maintains that she has a fiscal rule, and she will ensure that she complies with it even though it's impossible for her to do so. She will fail. I guarantee you that as surely as I can promise that the sun will come up tomorrow morning because both of those things are certainties.
So why is she doing this?
Because she has that millstone around her neck, created by Gordon Brown, and she has the second millstone around her neck, created by George Osborne, which is the Office for Budget Responsibility. The combination of fiscal rules and the Office for Budget Responsibility has destroyed all ideas that exist around competent economic management in the UK, at least with regard to government. And as a consequence, we are ending up in the mess we're in.
So where would I go? I would abolish the Office for Budget Responsibility. It has no purpose. It's just a function within the Treasury. It is no more than that. To pretend that this group of people who sit in one room in the Treasury building are somehow dominating the whole of economic policy for the UK is quite absurd. They aren't, and they will get their work wrong, as we know they have always done.
And I would abolish fiscal rules, and I would instead say, I'm going to manage the UK economy so that it is resilient to threats so that the people of the UK are protected from harm; the people of the UK have opportunity and that we are going to create an environment where there is demand so that we can create the investment for the things that will sustain us in the long term.
That would be a real economic policy.
Balancing the books is not.
Rachel Reeves needs to start understanding economics and stop thinking like a bookkeeper.
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Someone should ask her where her rules originate.
Fiscal rules are created to constrain government action. That is all.
The pretended existence of this constraint, and politicians paying lip service to it, is intended to assuage concerns from big business and the City of London about the general medium term intentions of the government. Perhaps that was needed in 1997 (“no more Tory boom and bust” haha, no, just gradual loosening until a Labour economic crisis) but Margaret Thatcher and John Major did not feel the need to tie themselves up with fiscal rules.
And the media waking up to them being self-imposed – and not laws of nature – and potentially being counterproductive, means I think such fiscal rules have limited utility today.
Agreed
The Guardian view says ‘spending cuts a choice; not a necessity.
Labour is clinging to economic myths while ignoring the tools of power.’
Someone has been reading your blog, I suspect.
https://www.theguardian.com/commentisfree/2025/mar/24/the-guardian-view-on-rachel-reevess-spending-cuts-a-choice-not-an-economic-necessity
It looks that way.
Agreed, the whole thing is a false narrative and the betting in Labour is that most people will simply just not go and look at what the reality of the options are.
What should Reeves be doing? Well, take away resigning ‘cos there’s no chance of that – but surely the management of the economy needs to be situational in order to get the best outcomes for everyone? Never mind coming in with some preconceived ideas and rigidly applying them.
The problem, as suggested by her activities outside of work, is that Reeves is not working for everyone in the country is she?
And you know why don’t you?
Or you should……………….
Reeves, Stymied, Streeting, the PLP – the lot of them are just a bunch of ‘Can’ts’. Because they won’t. Because that is what they’ve been told to do.
So, who is gaining?
From Reeves, the banks
From Streeting, big pharma.
From Starmer? His wardrobe.
Cui bono, you ask.
From Starmer? Power – even if only an illusion.
It’s only the rich who gain at the end of the day.
That’s who gains.
Starmer, Reeves, Streeting will be like those bankers who having brought down the bank, who will be still paid well not to reveal all – they’ll be looked after to be quiet. But that is small beer.
The big winners are private individuals or collections of, who just want to exploit the commons and makes loads of money. Every thing is exploitable – it’s the only way to maintain their position is for the rich to get richer. That is the mad logic of capitalism.
You’ll see. Starmer will feted one day as a great leader by those who made him, and those whom he made.
What we think won’t even figure.
Another very clear & helpful chapter in the Richard J Murphy “Economics Primer for the Public” textbook.
If you aren’t careful you will soon become a national treasure.
Thanks especially for the succinct paragraph on the Bank of Englands role in the sinking of the Brittania Unchained miracle HMS Truss after only 45 days of her maiden voyage.
I think that snowballs will definitely freeze in hell before I am a national treasure
Totally agree. A brilliant, comprehensiveexpose of the nonsense peddled by successive chancellors, economists and the media over the last two decades. Sadly you’re probably right about not becoming a national treasure. Nor will Stephanie Kelton. You both attack the economic fiction, incompetence and lies that keep the rich and powerful rich and powerful and the poor in continual decline. I seem to recall someone overturning tables and driving out merchants and moneychangers from the temple. Look what happened to him.
Thanks
Any fiscal rule – if you have to have one – should benefit as many people in society as possible, and leave none disadvantaged. It’s not simply ‘the rule’. It’s the output of it that concerns me.
I think Mike Parr’s suggestion that we should rename the Treasury as the Finance Ministry, and therefore the Chancellor of the Exchequer as a mere Finance Minister, is an excellent one. Finance should be accorded no special status. It is there to serve other departments, not to rule them.
Excellent idea.
I’m blushing.
What comes out from this blog is layers, – layers of orgs (the ofiice of this, the office of that), rules, more rules, changed rules.
The one aim of all this is to allow the finance minister to claim that his/her hands are tied. Which is what Reeves does, day in day out – she’s like a bloody parrot – “fiscal rules, fiscal rules, fiscal rules”.
This being the case – why do we have a finance minister/parrot? Obvs they can’t do anything – so why not get rid of them?
Of course, there is a broader question: has ANY finance minster ever understood how gov finance works?
Brown never did (cos he was “frightened” of “markets – hence fiscal rules), Osbourne? (sniggers), the others? I’d suggest they don’t have a clue – so they ALL laspe into simplicisms & all avoid any sort of interview that would find out how much (or little) they know, guessing, I suspect they know very little, & they know it & they are frightened that others might find out & they will do anything to make sure this reality is not discovered. Meanwhile, the country goes to the dogs – all because utter incompetents are finance ministers.
Thank you. I echo and go further. The Treasury should be split into three ministries, finance, economics and economic development.
I’m also increasingly of the view that these Whitehall palaces, Treasury and Foreign Office, allow an unhealthy culture of (imperial) arrogance, domination and exclusion to thrive.
I broadly agree with that, and especially your last comment. They are leftovers from the colonial era and need to go.
Today, editorial no less.
https://www.theguardian.com/commentisfree/2025/mar/24/the-guardian-view-on-rachel-reevess-spending-cuts-a-choice-not-an-economic-necessity
Someone is getting VERY worried.
KUTGW!
Written earlier this month – Why Rachel Reeves’ fiscal rules are stupid: https://dearscotland.substack.com/p/why-rachel-reeves-fiscal-rules-are
Heather Stewart is worried too,
https://www.theguardian.com/politics/2025/mar/25/fiscal-hawk-or-playing-a-bad-hand-what-kind-of-chancellor-is-rachel-reeves
this article seems to be an attempt to shore up Rachel Reeves as a person and prevent moves to sack her.
Interesting that the Guardian “economics editor” doesn’t include much actual economics in this piece – it’s all about PR and optics, with a little sprinkling of “secret sauce” (briefings the sources “can’t divulge”) to intimidate mere mortals outside the magic circle.
Thank you, Robert.
Reeves appointed season political fighter Matt Pound as adviser. He’s earning his rations.
I just asked Google “what is the yearly cost of the OBR in UK”
This was the response:-
“The Office for Budget Responsibility (OBR) in the UK has an annual budget of around £4.5 million, which was uplifted by £250,000 in the annual delegation letter to fund a new supply-side analysis unit and the transfer of the OBR’s IT function to HM Treasury’s TrIS network.
Here’s a more detailed breakdown:
Annual Budget: The OBR’s annual budget is around £4.5 million.
Uplift: This budget was increased by £250,000 to £4,566,000 in the annual delegation letter.
Purpose of Uplift: The uplift is intended to provide additional resources for a new supply-side analysis unit and to cover the cost of transferring the OBR’s IT function to HM Treasury’s TrIS network.
OBR’s Role: The OBR provides independent and authoritative analysis of the UK’s public finances.
OBR’s Staff: The OBR is supported by 52 civil servants. ”
Well, there’s an immediate saving that can be made and the civil servants could be gainfully employed elsewhere!
Thank you and well said, Richard.
I have worked on City trading floors and often engaged the traders and economists*. The economics teams often sit in / with the capital markets. *One, sometimes on tv, shares the same surname as me.
Many, if not most, traders have no background in economics. Some, including a friend, came up from operations and left school at 16 or 18, but that is rare now.
Most months, I attend the talks by my employer’s economics team and read their bulletins to clients. I can’t recall fiscal rules being discussed.
Thirty years ago, when writing a master’s on central bank independence, my tutor and I listened to the Argentine finance minister boast that Argentina met the criteria for European monetary union. Our jaws hit the floor.
Two decades later, I listened to a yellow Tory minister say the UK should mimic Germany and adopt fiscal rules as part of its constitution. My jaw hit the floor again. I knew where that nonsense came from. Germany’s yellow Tories are neo-liberal and were eager to return to the federal government. I was tempted to say that, as the UK has no written constitution or a single code, this idea and the forum where it was expressed could join the https://en.wikipedia.org/wiki/Lascelles_Principles.
With these daft fiscal rules, if I had any drawing ability I would do a political cartoon based on the ludicrous red box photo op where instead of the red box I’d depict the chancellor holding aloft pristine leather bound ledgers saying “behold my wonderfully balanced books” while behind her a smoking London is seen in ruins…
https://www.theguardian.com/uk-news/2025/mar/25/what-to-expect-rachel-reevess-brief-spring-statement
This wasn’t published until about an hour ago. In it they state “She had already promised to stay within the spending limits laid out in her October budget. She will say that her fiscal rules are sacrosanct for the rest of the parliament.”
What if the situation in Ukraine becomes really nasty and we need far more resources?
What if there is a climate related disaster that needs far from normal government resources?
Is the government just going to sit on its hands and do nothing?
Will they let people suffer or cause others to suffer because their current payments are filched from them by the Government?
Have they learned nothing from the past?
Have they no imagination?
Have they no feelings?
Have they no commonsense?
It’s governments like this that give politics a bad name.
My version of this will be out in the morning