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 of a parliament, and left alone unless there is a large shock.

Headroom is the wrong thing to target

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, 2025b). That sounds comfortable, but it is smaller than it looks. 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, and that headroom of 0.3 per cent of GDP, as in March 2025, would have been wiped out between forecasts on 34 per cent of occasions (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 that the typical revision is bigger than 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 that revisions are lumpy. At 6 of 17 forecasts, the economy-driven revision alone was larger than the headroom, and in November 2022 it reached £74.8 billion, against headroom of just £9.2 billion. Of those six, three revisions (March 2016, November 2022 and March 2025) wiped the headroom out, and three (October 2021, March 2023 and November 2023) would have handed 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 OBR put it plainly in March 2025: the average absolute final-year revision to pre-measures borrowing over the previous ten forecasts was £19.4 billion, and Chancellors had set aside £31.3 billion on average since 2010 (OBR, 2025a).

Fiscal headroom vs the OBR's own borrowing forecast revisions, 2016-2026

Chart: Headroom against the main fiscal rule is regularly matched or overwhelmed by a single forecast's revisions to borrowing.
Source: OBR Economic and fiscal outlooks, Mar 2016–Mar 2026.

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

Let the referees referee

The UK has built a sensible division of labour. The Bank of England is responsible for inflation. The OBR is responsible for the macroeconomic forecast, including the productivity assumption that drives so much of the fiscal arithmetic. They may be right or wrong, and like every forecaster they will often be wrong. But it makes no sense to rewrite the fiscal plan every year according to their revisions. A change to trend productivity is a judgement about the long run, and it can be reversed a year later.

When fiscal policy follows every revision, tax rises are announced and softened, spending envelopes cut and topped up, and investment delayed while everyone waits for the next forecast. The government recognised part of the problem when it legislated so that the OBR assesses the fiscal rules only once a year, at the Budget (OBR, 2026). That is a step in the right direction, but the underlying logic is unchanged: the plan still bends to the forecast.

Set the rules once per parliament

My proposal is simple. A government should set its fiscal rules at the start of a parliament and change them only after a large shock, such as the Global Financial Crisis or Covid-19. Some years the targets will be hit and some years they will be missed. That is fine. Plans should be adjusted only if the public finances are persistently off course in the wrong direction, not because a single forecast round 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 its stewardship of the public finances at the ballot box. That is accountability on the horizon over which fiscal policy actually operates.

Other countries already work this way. In Sweden, fiscal targets are averages over the economic cycle, and an all-party commission reviews the framework only every second electoral period (Government Offices of Sweden). 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). A crisis does not have to mean tearing up the rules either: research covering 56 countries finds that escape clauses written into law reduce sovereign borrowing costs during financial crises, while ad hoc deviations do not (Economics Letters, 2025).

Rules that are regularly rewritten are bad rules

The UK has done the opposite. 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). The Institute for Government called the October 2024 reform the "ninth change of rules in 16 years" (IfG, 2024b). UK fiscal rules have the shortest average life of any advanced economy (Tetlow, Bartrum and Pope, 2024, cited in 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.

Stability pays

The case for stability is not just about good manners. Uncertainty about fiscal policy is costly in itself. Fernández-Villaverde, Guerrón-Quintana, Kuester and Rubio-Ramírez (2015) find that shocks to fiscal policy uncertainty have a sizeable adverse effect on economic activity. Baker, Bloom and Davis (2016) estimate that a rise in policy uncertainty of the size seen in the US between 2005-06 and 2011-12 foreshadows investment about 6 per cent lower. Credible institutions help: countries with independent fiscal councils have primary balances about 1.5 percentage points of GDP higher, although that is a correlation rather than proof of cause (Debrun and Kinda, 2014).

The UK has also had a vivid demonstration of what happens when the fiscal framework loses credibility. After the September 2022 "mini-budget", 30-year gilt yields rose by about 160 basis points in a few days, more than twice the largest four-day rise since 2000. 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).

Stability also makes a country attractive to investors. A firm choosing where to build a factory cares less about the size of the headroom than about whether corporation tax and investment allowances will still be in place in five years.

Conclusion

The UK does not need cleverer fiscal rules. It needs rules it keeps. Set them at the start of a parliament, focused on long-term sustainability. Let the Bank of England worry about inflation and the OBR about the forecast. Accept that targets will sometimes be missed, adjust only if the public finances drift persistently in the wrong direction, and suspend the rules only through a legal escape clause after a genuinely large shock. Then let voters keep the score. 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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