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The writer, an FT contributing editor, is a former chief economist at the Bank of England

Well-designed fiscal frameworks are the cornerstone of macroeconomic success. By anchoring expectations for government borrowing, they lower uncertainty and economy-wide borrowing costs. They also support growth, by cushioning or countering adverse shocks to the economy and enabling public investment.

On these criteria, the UK’s fiscal framework fares poorly, more millstone than cornerstone. As currently designed, it is amplifying rather than reducing uncertainty about fiscal policy. It is an inhibitor, not enabler, of growth. Unless it is reformed fundamentally in November’s Budget, prospects for UK growth — and this government — are unlikely to improve.

The optimal framework for macroeconomic policy involves combining elements of both rules and discretion — “constrained discretion”. The “rules” element, often the focus of attention, is important for providing clarity and a degree of pre-commitment to ensuring policies are sustainable. That matters for credibility, not least in the eyes of bond markets.

But the “discretion” element is important for credibility too. It allows governments to act as a shock absorber, responding countercyclically to protect growth and jobs following adverse events. That flexibility has proved crucial. Among G7 countries, fiscal support averaged 5-10 per cent of GDP during the Global Financial Crisis and 15-20 per cent during Covid.

Ironically, policy frameworks of the past have often foundered on the rocks of inflexibility. It was the fear of policy cratering, rather than cushioning, the economy that caused the UK to abandon the Gold Standard, monetary targets and the Exchange Rate Mechanism. The “ironclad” nature of these rules was the very thing that made policy leaden-footed and tin-eared when growth soured. This fate now awaits the current ironclad fiscal framework.

Like inflation targets for monetary policy, fiscal rules are set in the expectation of being hit at some future point. And as with inflation forecasts, the uncertainty around projections of the fiscal position is large. As the Office for Budget Responsibility makes clear, this uncertainty amounts to several percentage points of GDP at a five-year horizon and much more at the longer horizons relevant to judging debt sustainability.

This degree of uncertainty dwarfs the levels of fiscal headroom, or slack, built into the current fiscal framework of this government (and its predecessor), which stands at around 0.3 per cent of GDP. This means even tiny changes in growth or borrowing cost assumptions risk the rules being breached. A mere 0.1 per cent lowering of trend productivity — a macroeconomic rounding error — is sufficient to wipe out the government’s entire fiscal headroom.

This has generated unhelpful knee-jerk reflex speculation and uncertainty about UK fiscal policy. The ink was barely dry on last year’s “one and done” Budget — intended to fill the previous government’s black hole — when fevered speculation began about tax rises needed to fill the black hole in this year’s Budget. The year-long uncertainty created by this fiscal speculation has been acutely damaging to growth.

The most authoritative measure of economic policy uncertainty was devised by economists Baker, Bloom and Davis. For the UK, this measure spiked sharply higher following last year’s Budget, peaking this April just below its peak at the time of the Brexit referendum in 2016. It remains around double its average before last year’s Budget. A global phenomenon, true, but the UK’s uncertainty spike is notably larger.

It is well established that policy uncertainty of this type lowers growth and jobs and raises borrowing costs. The average rise in UK policy uncertainty since last year’s Budget is more than one standard deviation. Based on past studies, that would knock around 0.5-2 per cent off UK growth in the near term. Negative effects on business investment are larger still, at around 3-5 per cent, and longer lasting.

The path and peak of UK policy uncertainty over the past year eerily mimics the pattern at the time of the Brexit referendum. The uncertainty effects of the latter are estimated to have reduced UK GDP by 1.5-2.5 per cent and business investment by 3-6 per cent in the years after it. We are already beginning to see the effects in subdued sentiment, and higher precautionary saving, among UK businesses and consumers.

The negative effects of the UK’s fiscal framework on growth do not end there. A fiscal gap of around £30bn will need to be filled in this year’s Budget, either through lower spending or higher taxes, even though a stalled economy needs a 1 per cent of GDP fiscal tightening like a hole in the head. As with broken policy frameworks of the past, today’s demands tightening at just the point the economy requires loosening.

Greater fiscal headroom would reduce uncertainty. A plausible extra cushion would be 1 per cent of GDP. But under the current fiscal framework, that headroom could only be created by tightening of the same amount, compounding the fiscal felony. Rules that invite us to pick our poison, growth-wise, are inhibitor not enabler, iceberg not anchor, shock-transmitter not absorber: a Brexit tribute act.

The fiscal position is, without question, fragile. Stabilising it requires radical reform of the tax code (the world’s most complex) and hard choices (tackling the big beasts of health and welfare). But the fiscal framework encourages tinkering inimical to real reform and to the growth needed to salve the UK’s debt problems. Root-and-branch reform is needed. In next week’s column I will discuss how.