The House of Commons has voted to approve the Charter for Budget Responsibility, enshrining new fiscal rules into law.
MPs backed the fiscal framework and charter, plans for which chancellor Rachel Reeves unveiled alongside her October Budget, in a vote yesterday afternoon.
The charter sets out a series of commitments designed to create a “stable and predictable fiscal policy environment”, including a spending review every two years and a single fiscal event each year.
The new fiscal framework is based on two key tenets: the “stability rule”, which aims to move the current budget into balance so that day-to-day spending is met by revenues rather than borrowing; and the “investment rule”, to reduce debt as a share of the economy. Debt will be defined as public sector net financial liabilities – which includes all government financial assets and liabilities, including student loans and funded pension schemes, providing a more complete picture than net debt, which has been used previously.
The Treasury plans to meet both rules in 2029-30, until that becomes the third year of the forecast – after which point the budget must remain in balance or in surplus, and debt should be falling as a share of the economy, from the third year of the rolling forecast period.
Outlining the new rules in a debate in the House of Commons yesterday, chief Treasury secretary Darren Jones said the stability rule will “provide a tougher constraint on day-to-day spending so that difficult decisions cannot be constantly delayed or deferred”.
He said the investment rule “keeps debt on a sustainable path while allowing the step change needed in investment by targeting a measure of debt that captures not just the debt that government owe, but financial assets that are expected to generate future returns”.
Under the charter, each spending review will set Departmental Expenditure Limits – which include both capital and day-to-day spending – for a minimum of three years of the five-year forecast period.
And the charter requires the Office for Budget Responsibility – which provides independent economic forecasts and independent analysis of the public finances – to report on the long-term impacts of capital investment and other policies at fiscal events.
Reeves has accepted all of the recommendations of the OBR’s review of the March 2024 forecast for Departmental Expenditure Limits, which was published alongside the Budget in October. Among other things, the review recommended that the OBR should be explicitly allowed to forecast DEL overspends as well as underspends; that the Treasury should provide the OBR with a departmental breakdown of DEL prior to each forecast, with accompanying text highlighting the risks to particular departmental settlements; and that the Treasury should give the OBR a quarterly report on the size of the central reserve used to fund unforeseen events, as well as commitments and pressures on the reserve.
The charter also outlines details of the fiscal lock, legislation for which was passed shortly after Labour came to power last July. The mechanism will prevent this or any future government from announcing “fiscally significant measures” – those with costs or savings equivalent to 1% or more of GDP in any financial year in the forecast period – without getting an independent assessment by the OBR.
When the fiscal lock was announced in July, Ben Zaranko, senior research economist at the Institute for Fiscal Studies, described is as a “rather theatrical way of promising not to do another mini-budget – or at least not to do another mini-budget without some accompanying independent analysis from the Office for Budget Responsibility”.
Addressing the House of Commons yesterday, Jones said: “I do not think members on either side of the House need reminding of what happens when huge unfunded fiscal commitments are made without proper scrutiny and key economic institutions such as the OBR are sidelined. We will not let that happen again.”
Jones said the government’s commitment to the new fiscal rules is “iron clad”.
“The UK has changed its fiscal rules in the past more than any other country, but this government know that stability matters,” he said.
“That is why the new charter sets out clearer circumstances under which the fiscal rules can temporarily be suspended through a new strengthened escape clause. The new escape clause requires a decision on suspension be supported by the OBR’s analysis so that the rules can be suspended only with sufficient justification.”
Commenting on yesterday’s vote, Reeves said: “In our Plan for Change we were clear that our top priority is growth built on stability. Today I have announced how I will go further and faster on growth and our fiscal rules, which have been enshrined in law, are now non-negotiable and the bedrock of that stability.”