What are fiscal rules and why do governments set them? 

Fiscal rules are restrictions on fiscal policy set by a government to constrain its own decisions on spending and taxes. For example, they might require that the deficit stays below a certain level.  

Without rules, fiscal policy is known to suffer from ‘deficit bias’: politicians face an incentive to borrow to spend more in the short term, and leave future generations (and future politicians) to deal with the consequences. Governments therefore use fiscal rules as a way to commit themselves to responsible management of the public finances and so increase confidence among taxpayers and investors. Since 1990 almost all OECD countries have adopted some sort of fiscal rule.[1] 

What fiscal rules have UK governments adopted? 

The first fiscal rules in the UK were adopted by the New Labour government in 1997. Those rules applied for over a decade, but since then the UK’s rules have changed more regularly. The current iteration of fiscal rules (set in October 2021) is the eighth set the UK has had. These eight sets of rules between them comprised 20 different rules in total, summarised in the table below. 

Table: Fiscal rules in the UK since 1997, and whether they were missed or met

Time in operation

Total deficit target for specific year

Current deficit target over economic cycle

Current deficit rolling target

Debt as a share of GDP

Welfare cap

Net investment below certain level on average

Debt interest below certain share of revenues

Falling in specific year

Rolling target

Keep below certain level

1997–2009   X       X      
2009–2010  X              
2010–2014               
2014–2015       X          
2015–2016  X     X     X    
2016–2019  X     X     X    
2019–2020        X    
2021–             

Note: A rule is considered met if the conditions set out by the rule are met, even if the rule was no longer in force by the time compliance could be evaluated. A rule is considered missed if the conditions are not met or, for rolling targets, if the government was not on track to comply with the rule when it was abandoned.  

What is being targeted? 

All the sets of rules bear similarities. In each, there were rules constraining borrowing and debt. However, these rules have also differed in important ways. 

Some have targeted the overall deficit (that is, the difference between total spending and total revenues), while others have targeted the current deficit (the difference between day-to-day spending and total revenues). Rules that target the overall deficit constrain investment spending, while the latter do not.  

The different debt rules adopted by successive governments have been more similar to one another, with most since 2009 stipulating that debt as a share of GDP should fall between two dates. However, this is different from the initial set of rules that required that debt should remain below a pre-specified ceiling. 

Some sets of rules have also constrained other totals, including welfare spending, debt interest spending and investment spending.   

When does the target need to be met? 

One of the most important differences between the rules is whether they have been forward-looking or ‘rolling’ targets, or whether they were ‘static’, applying in a particular year. A rolling target requires that the government be on course to meet a rule a certain number of years ahead based on the latest forecasts, with this date rolling forwards as time moves on. This means that, if the near-term forecast changes, the government does not immediately need to change policy to meet the rule. In contrast, static rules specify one particular year when the rule must be met I If the forecast changes, it can require the government to take rapid action to remain on course to meet the rule. 

Rolling targets provide additional flexibility to respond to unanticipated economic shocks because they enable the government to accommodate shocks in the short term before getting back on track in the medium term. However, these rules are less constraining and the spirit of the rules is more easily abused by governments, for example by consistently announcing ‘temporary’ short-term spending giveaways or announcing longer-term tax increases that never emerge. 

In recent times, the UK government has shown a clear preference for rolling targets. Since 2019, the current deficit targets announced have been three-year rolling targets. The debt rule set in October 2021 is the UK’s first forward-looking debt rule. 

Have previous fiscal rules been broken? 

In the first 10 years of the UK having fiscal rules, neither rule changed and neither was broken – although the way the ‘golden rule’ (that government would only borrow to invest, not manage day-to-day spending) was assessed was changed when it appeared on course to be missed.[2] However, the 2008 financial crisis changed this, leading to those first rules being abandoned.  

Since then, rules have tended to have a much shorter shelf life. All the other sets of rules have been abandoned because at least one could not be met – only seven of the 20 were met or on course to be met when they were abandoned. Of these, only four were the primary rules that constrained deficits or debt. Other rules – on investment and debt interest – have tended to prove easier to meet. 

None of the deficit rules that directly targeted a particular date were met. These types of rules are more difficult to meet, as they are vulnerable to short-term economic shocks. But only two of the four rolling deficit targets have been met too, despite the additional flexibility they afford.  

It is a good idea for governments to have the flexibility to respond appropriately to an economic downturn – for example by providing a demand stimulus through spending increases or tax cuts – than to slavishly follow a fiscal rule. The government was right, for example, in March 2020 when the UK entered its first lockdown to suspend its fiscal rules rather than try to prevent the deficit or debt rising, which would have had a far more catastrophic long-term effect on the UK economy.  

However, repeatedly abandoning fiscal rules risks undermining their credibility. One approach to reducing this perception of politicians ‘moving the goalposts’ is to define in advance sets of circumstances in which the rules will be suspended. Some of the UK’s sets of fiscal rules have had explicit ‘knock out’ clauses of this sort. For example, the rules in place in 2015 would no longer apply if the Office for Budget Responsibility (OBR) assessed that the UK economy experienced a ‘significant negative shock’.  

The economic circumstances of the last two decades undoubtedly contributed to the high rate of fiscal rule failure. Growth has been consistently weaker than forecasts have expected, resulting in  lower tax revenues – something exacerbated by the twin shocks of the financial crisis and Covid. This stands in contrast to the decade 1997–2007 when economic conditions were benign. 

Are fiscal rules still useful even though they are often broken? 

Even if fiscal rules are abandoned – even if appropriately, as in March 2020 – they can still play a useful role. They provide a useful commitment mechanism for politicians, especially when the economic outlook is stable. And they provide a clear statement of fiscal policy objectives, which allows independent observers – in particular, the OBR – to assess against the government’s own stated objectives. 

Dates active

Name of rule

Description of rule

1997–2009[3]

Golden rule

Revenues should cover day-to-day spending over the economic cycle

Sustainable investment rule

Over the economic cycle, debt must average no more than 40% of GDP

2009–2010[4] Falling deficit

For each year from 2010/11 to 2015/16, the deficit (%GDP) should be lower than the year before

Halving deficit The deficit in 2013/14 must be no more than half the 2009/10 level (% GDP)
Debt rule Debt (% GDP) to be falling in 2015/16
2010–2014[5] Fiscal mandate Cyclically-adjusted current budget should be in surplus at the end of a rolling five-year horizon
Supplementary debt target

Debt (% GDP) to be falling in 2015/16

2014–2015[6] Fiscal mandate Cyclically-adjusted current budget should be in surplus at the end of the third year of the rolling five-year forecast period
Supplementary debt target

Debt (% GDP) to be falling in 2016/17

Welfare cap Spending on working-age benefits must not exceed a pre-defined limit
2015–2016[7] Fiscal mandate

Run a surplus in 2019/20 and in every subsequent year

Supplementary debt target Debt (% GDP) to be falling in each year
Welfare cap As above
2016–2019[8] Fiscal mandate

Reduce cyclically-adjusted deficit to below 2% of GDP by 2020/21

Supplementary debt target Debt (% GDP) to be falling in 2020/21
Welfare cap As above
Fiscal objective Eliminate the deficit ‘as early as possible in the next parliament’
2019–2020[9] Current budget rule

Current budget should be in surplus by the third year of the rolling five-year forecast period

Investment cap

Public Sector Net Investment should be below 3% on average over the five-year forecast period

Debt interest spending rule Debt interest spending must not exceed 6% of revenues
2021[10] Net debt rule

Debt (% GDP, excluding Bank of England) should be falling in third year of forecast period

 


  1. International Monetary Fund, Fiscal Rules Dataset 1985 – 2021, www.imf.org/external/datamapper/fiscalrules/map/map.htm
  2. See page 86 of Chote, Emmerson and Tetlow (2009), ‘The fiscal rules and policy framework’ in The IFS Green Budget 2009, Institute for Fiscal Studies, 2009, https://ifs.org.uk/budgets/gb2009/09chap5.pdf
  3. HM Treasury, Stability and Investment for the Long Term Economic and Fiscal Strategy Report 1998, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/259789/3978.pdf , p16
  4. Fiscal Responsibility Act 2010, www.legislation.gov.uk/ukpga/2010/3/section/1/enacted
  5. HM Treasury, Charter for Budget Responsibility, 2011, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/194146/charter_budget_responsibility040411.pdf
  6. HM Treasury, Charter for Budget Responsibility: Autumn Statement 2014 update, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/386973/charter_for_budget_responsibility_AS2014_web.pdf
  7. HM Treasury, Charter for Budget Responsibility: autumn 2015 update, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/467082/PU1855_OBR_charter_final_web_Oct_2015.pdf
  8. HM Treasury, Charter for Budget Responsibility: autumn 2016 update, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/583547/charter_for_budget_responsibility_autumn_2016_update_final_for_laying_web.pdf
  9. The Conservative and Unionist Party, Manifesto 2019 Costings Document, www.conservatives.com/content/dam/conservatives/documents/static/2019/conservative-2019-costings.pdf
  10. HM Treasury, Charter for Budget Responsibility: autumn 2021 update, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1044692/Charter_for_Budget_Responsibility_FINAL.pdf
Update date: 
Wednesday, March 16, 2022

Original source – The Institute for Government

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