IFS director: Labour fiscal rules are 'daft' – they should borrow more

Paul Johnson, who heads up the Institute for Fiscal Studies (IFS), said on Wednesday morning that he believed Chancellor Rachel Reeves should borrow more money rather than imposing cuts.

Appearing on BBC Good Morning Scotland, Johnson was asked if Labour could borrow if they are confident the economy will grow.

He responded: “Well, [Reeves] herself has said very clearly – I mean she has absolutely doubled down on this – that she's going to follow essentially the same fiscal rules as the last government, which means that debt needs to be falling at the end of the five-year period. It’s a pretty daft fiscal rule.”

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It was then put to him that “governments always change fiscal rules”. Johnson replied: “That is true. That is absolutely true – and it is a pretty daft fiscal rule and she could change that.

“Maybe that'd be OK, but it would be a very, very sharp U-turn on the very, very clear statement that she has made.”

Johnson brought up suggestions that Reeves could be set to change the definition of debt in order to give herself more headroom to borrow.

However, he said: “I have to say my preference is for her not to do something that’s kind of as untransparent as that – and actually to say, ‘well, look, you know, we are going to borrow a bit more’.

“I don't think the markets would go mad if we borrow another £10 or 20 billion more than planned.

“But actually, in a slightly sort of less transparent way, she could change the details of the rule that she said that she's going to keep to.”

Prime Minister Keir Starmer warned of a 'painful' Autumn Budget (Image: PA)

Asked about the state of the UK’s finances, after Prime Minister Keir Starmer said his Labour government’s first Budget would be “painful”, Johnson said: “It’s important to distinguish where we are with the economy, which at least in the last year or so has been doing relatively well – although it's been doing badly for a much longer period before that, and the state of the public finances, which really are in trouble.

“It's also worth saying that essentially we knew all this before the election. Both parties were very keen not to draw attention to the fact that this is going to be a very, very difficult budget, a very, very difficult set of decisions before we voted for them, but now that they are in office, they're much keener to say how hard it really will be.”

Labour have repeatedly claimed that they only discovered the extent of a £20bn “black hole” in the public finances after taking office, accusing the Tories of covering up the dire financial straits which the UK is in.

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Asked if Reeves had ignored IFS warnings of a £20bn black hole, or if the situation is “actually much worse than you had predicted”, Johnson said: “I think there's a little bit of additional information that we've got since the election, particularly about the finances this year, and particularly about basically the costs of asylum, which are a few billion pounds more than you could readily see in the accounts.

“There's an additional £10bn this year which the Chancellor has decided to spend on higher public sector pay awards, which was actually entirely predictable that that's where she would end up doing.

“But the key issue is actually about the next four or five years, where we knew and it was set out very clearly, by the Office of Budget Responsibility and by ourselves at the Institute for Fiscal Studies, that there was a really big problem and if spending cuts were to be avoided, then tax increases would be needed.”

On Tuesday, Starmer ruled out raising income tax, VAT, or national insurance.

Between the 2023 Autumn Budget and leaving power, the Tory government said it had delivered “personal tax cuts … worth £20bn”.