The writer is the Gregory and Ania Coffey Professor of Economics at Harvard University and formerly First Deputy Managing Director and Chief Economist of the IMF.
The United Kingdom has a fiscal problem, and it is not (only) what you think it is. Much of the debate focuses on sluggish growth and high debt, but there is another issue — one that policymakers can fix far more quickly: excessive fiscal policy uncertainty.
An important driver of this is the repeated assessments of fiscal “headroom” by the Office for Budget Responsibility and the expectation — by markets, commentators and politicians — that any projected gap five years out must be closed immediately through tax rises or spending cuts. This cycle creates unnecessary policy uncertainty and market instability which has been shown to be costly, significantly reducing industrial production, tightening financial conditions and weakening sterling.
As chief economist of the IMF, I oversaw global growth projections. I value the information they provide, but I would be wary of treating any five-year forecast as precise. Economic projections are inherently uncertain. To then reassess taxes and spending every six months based on these long-range estimates introduces volatility into fiscal policy, volatility that markets can amplify.
Reeves could perhaps take note (hint: she won’t, of course).
Edit: BTW, the fiscal crisis the UK faces has a name: LABOUR.