Fortifying the Fiscal Framework (Economic Affairs Committee Report)

Lord Macpherson of Earl's Court Excerpts

Tuesday 3rd November 2026 Grand Committee

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I congratulate the noble Lords, Lord Liddle and Lord Wood, and the committee on a persuasive and thoughtful report.

I must confess to having a love/hate relationship with fiscal rules—love because I am all in favour of fiscal rectitude but hate because, whatever rule is put in place, it is steadily subverted as Governments become fixated on hitting the target while missing the point. I am arguably the author of my own misfortune, since I was Permanent Secretary to the Treasury when five of the 10 fiscal rule regimes, so expertly catalogued by the committee, were put in place.

I recognise and share all the committee’s criticisms of the rules, and last week’s Budget provides further proof of its analysis. Borrowing and debt is higher in every year of the forecast compared to last year’s Budget, but nevertheless the Government meet the rules with broadly the same headroom. That is counterintuitive. I should be clear that that is not a criticism of the macro judgment of the Chancellor’s Budget; I thought that judgment was broadly correct, and I welcome the reception that has been given by the gilt market.

I also welcome the strengthening of the framework in 2024, but the challenge of fiscal policy, as the noble Lord, Lord Liddle, pointed out, is that spending and revenue levels are huge and subject to substantial forecasting error. Left to my own devices, I would set a fiscal target of balancing a Budget—or at least the current Budget—year by year, but such a target would not lend itself to the current fiscal rules framework without having a very large cushion indeed. Fiscal targets therefore have to be set over the medium term. That means they have to be rolled forward year by year, and that provides endless scope for gaming, as just about everyone has pointed out.

No doubt the rules can be further improved, and the committee makes some good suggestions but, as I told successive Chancellors, “Don’t get mesmerised by the rules. Meeting them on their own does not give you credibility. Rather, focus on the substance. If you have a credible plan underpinned by credible tax and spending policies, the markets will reward you”.

At the weekend, I ignored the advice of the noble Lord, Lord Blackwater, and read the book by the last Prime Minister but two, Bank Job, in which she argues that the OBR should be abolished. It is always important to expose yourself to different views, and actually it is worth a read—it is quite short—but, sadly, I was not persuaded. In my view, the committee is right to praise the role of the Office for Budget Responsibility. It is not the OBR’s fault if Governments feel constrained; that is the inevitable consequence of sailing too close to the wind. The OBR will never get its forecast right—that is because no forecaster gets forecasts right over and over again—but at least its forecasts are unbiased, unlike the Treasury’s of old. One of the many things I learned there is that, when Governments assumed they had increased the trend rate of growth in the economy, they were invariably deluding themselves.

Between 1945 and 2008, the British economy generally grew by 2.25% a year. Since then, it has grown much more slowly. The OBR’s latest forecast reflects that. Perhaps it assumes that the economy will grow too slowly, but it should attach a high bar to raising its view of the trend growth in productivity. As the committee advises, it should also attach a high bar to the dynamic scoring of policy measures. In my experience, it takes many years, even decades, for any structural reform to feed through to economic growth. I worry that Chancellors and officials of late spend too much time trying to press the OBR to accept their view of the dynamic effects of policy changes. Again, they would be better advised to focus on the substance; if policies have a dynamic effect, they should regard that as a bonus.

Finally, I endorse the committee’s desire to upgrade the status of the OBR’s Fiscal Risks and Sustainability report. You did not have to be a genius to spot the demographic time bomb, which has finally exploded; indeed, I remember working on the Fowler reviews in the 1980s, which were predicated on this demographic time bomb. Setting out its fiscal consequences so lucidly provides a service to a media and political class who have an uncanny knack of ignoring it. Anything Parliament can do to give it a higher profile should be warmly welcomed.