IFS Working Papers, Institute for Fiscal Studies (IFS) 04/29
The 1998 Code for Fiscal Stability sets out the framework within which UK fiscal policy is now set. While having such a code does not make it easier for a Government to meet its fiscal objectives, it may improve the economic credibility of the policy process. To date the Code has generally worked well, and in any case many of the Treasury's practices exceed the minimum requirements of the Code. However, improvements could be made in the light of recent experiences. In particular it would be preferable for less emphasis to be placed on the precise forecasts for fiscal aggregates and greater emphasis to be placed on the magnitude of the risks to those forecasts. Using the projections contained in the March 2004 Budget, and information on the size of errors made in the past, we estimate that there is now a 60% chance that the Chancellor's golden rule will be met without further tax increases or spending cuts. This compares to 74% for the forecast made by the Treasury 12 months earlier. As well as clarifying how cautious forecasts are, the uncertainty surrounding projections for fiscal aggregates also has implications for the way in which progress towards any fiscal rules should be interpreted.