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. For weeks, the debate about Britain's public finances comes down to a single number.

That ritual is bad economics. Tax and spending decisions should aim for stability, for a tax system that makes the UK an attractive place to invest, and for long-term fiscal sustainability, not chase every change in the outlook. That requires fiscal rules set once, at the start of a parliament, and left alone unless there is a large shock.

A cushion thinner than the noise

Headroom is the margin by which the government is forecast to meet its fiscal rule several years ahead. In November 2025, the Office for Budget Responsibility (OBR) estimated that the main rule, a balanced current budget in 2029-30, would be met by about £22 billion, or 0.6 per cent of GDP (OBR, 2025). That sounds comfortable, but the IFS points out that 0.6 per cent of GDP is exactly the size of the average underlying revision to the OBR's fourth-year forecast (Zaranko, 2026).

None of this is anyone's fault. The OBR's median absolute borrowing error rises from 0.5 per cent of GDP one year ahead to 3.1 per cent five years ahead (OBR, 2023). Headroom moves with gilt yields, energy prices, productivity and inflation, none of which the Treasury controls in the short run.

The problem is not only that the typical revision is almost as large as the typical headroom. Over the past decade, the median headroom was £13.9 billion and the median economy-driven revision to borrowing in the target year was £12.4 billion. The problem is also that revisions are lumpy. At 6 of 17 forecasts, the economy-driven revision alone was larger than the headroom, either wiping out the headroom or handing the Chancellor a windfall. Either way, a government that targets headroom ends up chasing forecast noise: cutting in one case and tempted to spend in the other.

The result, in the IFS's words, is that "forecast volatility feeds through almost one-for-one into policy volatility" (Zaranko, 2026).

The OBR and the Bank of England work well; the Treasury should not chase them

Two other pillars of fiscal stability in Britain work well. The Bank of England sets monetary policy independently to keep inflation on target. The OBR, an independent fiscal council, produces the official forecast, including the productivity assumption that drives so much of the fiscal arithmetic. That is a real advantage: across countries, fiscal councils that monitor the rules are associated with primary balances about 1.5 percentage points of GDP higher (Debrun and Kinda, 2014).

But the Treasury should not respond in real time to every forecast update or every change in monetary policy. Like every forecaster, the OBR will often be wrong, and the Bank of England will move interest rates as the outlook changes. A change to trend productivity is a judgement about the long run that can be reversed a year later. Rewriting the plan after each revision means tax rises announced then softened, spending envelopes cut and topped up, and investment delayed while everyone waits for the next forecast. Legislating so that the OBR assesses the rules only once a year, at the Budget, was a step in the right direction (OBR, 2026). But the plan still bends to the forecast.

So the weakness of Britain's framework is not the OBR or the Bank of England. It is the fiscal rules themselves: rules that keep being rewritten, and a focus on headroom that turns every forecast into a fiscal event.

A rulebook rewritten ten times

The rules set in 1997 lasted for more than a decade. The current rules, adopted in October 2024, are the tenth set since then. Every set since 2008 has been abandoned, and only 11 of the 26 earlier rules were met or on track when they were dropped (IfG, 2025). UK fiscal rules have the shortest average life of any advanced economy (Tetlow, Bartrum and Pope, 2024, cited in Zaranko, 2026). As the IFS puts it, "whenever a particularly bad shock comes along, or the government changes, the rules are changed" (Zaranko, 2026).

A rule that is rewritten whenever it becomes inconvenient is not a rule. It is a target with an exit clause. Markets understand this, and so do voters. You do not change the rules of the game during the match.

What stable rules look like: international examples

It does not have to be like this. In Sweden, fiscal targets are averages over the economic cycle instead of at the end of the forecast horizon, and an all-party commission reviews the framework only every second electoral period, roughly every eight years (Government Offices of Sweden). Sweden does not hit its numbers like clockwork: on the backward-looking eight-year average, it mostly undershot its surplus target (Fiscal Policy Council, 2026). Yet its government debt fell from about 39 per cent of GDP in 2007 to about 35 per cent in 2025, while the UK's rose from about 42 per cent to about 101 per cent (Eurostat; OBR, 2026b). The lesson is stable rules, not hitting numbers: deviations come with a plan to return, and changes come from cross-party reviews on a timetable, not in a crisis.

Switzerland's debt brake is written into the constitution, with a narrow escape clause and a six-year payback period. Forecast errors go into a compensation account rather than triggering a change to the rule, and federal debt fell from 25.3 per cent of GDP in 2003 to 13.5 per cent in 2019 (Swiss Federal Finance Administration). Then Covid struck, and the rule bent without breaking. Parliament voted around CHF 30 billion of extraordinary spending by the required qualified majority. It went into an amortisation account to be paid off from future surpluses, with the deadline extended by law to 2035 (Swiss Federal Finance Administration).

Swiss federal debt rose to 15.6 per cent of GDP in 2022 and was 15.7 per cent in 2024 (Swiss Federal Statistical Office). Over the same period, UK government debt rose from about 84 per cent of GDP in 2019-20 to about 101 per cent in 2025-26 (OBR, 2026b), and Britain replaced its fiscal rules three times (IfG, 2025). The levels are not comparable, since the Swiss figure covers only the federal government. The contrast is in the rules: Switzerland absorbed the shock within its rule; Britain rewrote its own.

That is what an escape clause written into law is for. It allows heavy spending in a genuine emergency, but sets out in advance who decides, what counts as an emergency and how the money is paid back. Across 56 countries, such clauses soften the squeeze on bank credit and reduce sovereign borrowing costs during financial crises, while ad hoc deviations do not (Economics Letters, 2025). Germany shows that the conditions can bite. Its debt brake allows extra borrowing once the Bundestag declares an emergency, as it did during the pandemic. But when the government tried to shift €60 billion of unused pandemic borrowing authority into a climate fund for later years, the Constitutional Court struck it down (Federal Constitutional Court, 2023). An escape clause is a door out of the rules in a crisis, not a way round them.

Stability pays

Uncertainty about fiscal policy is costly in itself: shocks to fiscal policy uncertainty have a sizeable adverse effect on economic activity (Fernández-Villaverde, Guerrón-Quintana, Kuester and Rubio-Ramírez, 2015). Britain has seen the extreme case. After the September 2022 "mini-budget", 30-year gilt yields rose by about 160 basis points in a few days. Liability-driven investment funds faced forced sales of at least £50 billion of gilts, and the Bank of England had to step in to restore order (Bank of England, 2022).

Investors notice the everyday version too. A firm choosing where to build a factory cares less about the headroom than about whether corporation tax and investment allowances will still be in place in five years.

Set the rules once, then let voters keep the score

My proposal is simple. Set the fiscal rules at the start of a parliament, focused on long-term sustainability, and suspend them only after a large shock, such as the Global Financial Crisis or Covid-19, through a legal escape clause with a plan to return. Some years the targets will be hit and some years missed. That is fine. Adjust plans only if the public finances are persistently off course in the wrong direction, not because one forecast moved the target-year number by a few billion pounds.

At the end of the parliament, the outcome is plain for all to see: if the government ends in deficit when it promised balance, or runs a surplus by squeezing services, voters can judge it at the ballot box. That is accountability on the horizon over which fiscal policy actually operates.

The UK does not need cleverer fiscal rules. It needs rules it keeps. That would do more for confidence in Britain's public finances than another round of headroom management on 28 October.

Sources

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