Rachel Reeves’s fiscal rules buffer should be ‘significantly larger’, say peers

Rachel Reeves should aim to run a “significantly larger” buffer against her fiscal rules, according to a report from a House of Lords committee that says the UK’s public debt is on an unsustainable trajectory.

The chancellor raised taxes at last year’s budget in order to more than double the “headroom”, or buffer, against her fiscal rules to £22bn – some of which is expected to be eroded by the impact of the Iran war.

But the Lords economic affairs committee says Reeves should aim to raise it more, and complains that she and her recent predecessors have tended to allow themselves too little room for manoeuvre, compared with the £30bn average between 2010 and 2022.

“Despite the recent increase in the size of the buffer, it remains at an historically low level and further substantial increases are still required,” it says. “Significantly larger buffers must become the norm.”

It criticises successive governments for treating fiscal buffers as “war chests” to be run down to a minimum, “with all the destabilising implications for potentially chaotic policy change this brings”.

The high-powered committee, chaired by the Labour peer Stewart Wood, includes the former Treasury permanent secretary Terry Burns, the economist Alison Wolf, and the former chancellor Norman Lamont, who has stepped down since the inquiry into the UK’s fiscal framework was completed.

“Not just this government, but governments for a long time, have been operating at such a dangerously low level of fiscal headroom that they’re sort of operating near the cliff-edge,” Wood told the Guardian.

In the report, Fortifying the Fiscal Framework, the peers sound the alarm about the long-term path of fiscal policy, echoing recent warnings from watchdog the Office for Budget Responsibility (OBR).

“On current tax and spending settings, the UK is on a path to unsustainable debt levels,” the report says. “These issues should be of paramount concern for the government, not least because the last few decades have repeatedly shown that crises occur sufficiently often that benign projections prove overly optimistic.” As if to underline their argument, another crisis, the conflict in the Middle East, has occurred in the course of the committee’s inquiry.

The peers call for more attention to be paid to the OBR’s annual “fiscal risks and sustainability report”, including a House of Commons debate led by the chancellor.