UK Economic Perspectives "UK leadership transition: What to watch" Titareva

Research evidence excerpt

UK Economic Perspectives "UK leadership transition: What to watch" Titareva

Fiscal rules likely to be the key constraint but some flexibility likely exists

The key market concern in the context of a potential leadership change is what this

might mean for fiscal policy and the government’s adherence to fiscal rules. Over recent

weeks, Mr Burnham appears to have softened his position from previous comments that

the UK should not be “in hock” to bond markets by saying that he “supports fiscal

rules”, which he also reiterated in his most recent speech. Importantly, both the

pamphlet by the Tribune group of left-wing Labour MPs and the Labour-affiliated

Mainstream essay on the Productive State encourage compliance with fiscal rules. That

said, we think this could still leave some space for exploring flexibility – for example by

extending the timeframe during which fiscal rules must be met.

More scope for change in capital spending rule than day-to-day spending

So far, in his public remarks, Mr Burnham has focused on long-term strategy, arguing

that higher investment could yield stronger growth and lower public spending over

time. However, in the near term, the government is likely to face rising spending

pressures – particularly on energy support and defence – while remaining constrained

on the revenue side if it adheres to its pre-election commitments not to increase income

tax, VAT, or corporation tax. Against this backdrop, we think the government is likely to

explore flexibility within the fiscal rules, especially those related to capital spending.

Under the current framework, the UK has two fiscal rules. First, the “stability rule”

requires the current budget (day-to-day spending) to be balanced or in surplus by the

third year of the forecast period.