Stop chasing the headroom: why Britain's fiscal plans should ignore forecast noise
Headroom, the few billion pounds by which the Chancellor is forecast to meet the fiscal rules, is the wrong target. It moves with forecast noise the Treasury barely controls, so chasing it makes tax and spending policy just as noisy. Set the rules once per parliament, stick to them unless there is a genuine crisis, and let voters judge the result at the end. On 28 October, the Chancellor will present his first Budget. The run-up has followed a familiar script: a new forecast arrives, the estimated "headroom" against the fiscal rules shrinks or grows by a few billion pounds, and taxes and spending are adjusted to match. In this article, I argue that this ritual is bad economics. Tax and spending decisions should not react to short-term changes in the economic outlook. They should aim for stability, for a tax system that makes the UK an attractive place to invest, and for long-term fiscal sustainability. To get there, the UK needs fiscal rules that are set once, at the start o...