Context:

KPMG International and Jericho hosted a roundtable discussion in March 2025 to explore how to rethink the UK’s fiscal rules to breathe life into the economy.

With productivity and growth sluggish, should the UK take a more flexible approach to fiscal policy, or do strict tax and spending rules ensure long-term economic stability? How can the government reconcile the pressure on public finances with increasing demands for spending on health, social care, education, defence and infrastructure? Is there a way to address these needs without stifling economic growth and worsening the already fragile economic outlook?

The conversation was held under the Chatham House Rule (which means nothing can be attributed directly to attendees) and was attended by fourteen expert participants (see below for a list of attendees). The write-up below summarises the personal views of participants and does not necessarily reflect the view of any particular organisation, including KPMG.

Executive Summary:

  • There are significant differences in fiscal rules across countries, with the shift towards independent institutions stemming from concerns over political mismanagement of the economy and trust in the political class.
  • Fiscal rules often serve as a credibility tool rather than a genuine constraint on government spending. Rigid deficit targets can be counterproductive, especially in periods of low growth.
  • Fiscal rules are frequently revised, raising questions about their long-term reliability. A more flexible approach, with independent bodies playing a greater role in assessing economic sustainability rather than enforcing rigid short term, numerical targets could be more helpful.
  • The UK’s reluctance to adapt to economic realities over the long term has contributed to stagnation. The problems of excessive risk aversion, skills shortages and an unstable investment environment undermine long-term economic growth.
  • AI could drive productivity but regulatory uncertainty and high costs could hinder rapid adoption.
  • The UK’s declining manufacturing base and skills shortages present barriers to faster industrial shifts, though sectors like space and digital security offer growth potential. There are also challenges in work culture and taxation gaps.
  • Short-term electoral considerations often override long-term economic strategy, leading to inconsistent policy implementation but greater local control could improve regional economic resilience.

Fiscal Rules in the UK and The International Context

Variation in fiscal rules, the need for independent monetary institutions, gaming the system, rigid constraints and the challenge of political commitments

Participants highlighted the significant variation in fiscal rules across different countries. The US operates with a high debt ceiling and state-level fiscal autonomy, which has occasionally led to state bankruptcies. In contrast, Europe’s “Stability and Growth Pact” enforces fiscal discipline, though recent geopolitical and defence concerns have introduced greater flexibility. In the UK, fiscal targets have evolved over time, from a focus on the balance of payments to money supply control in the 1980s, reflecting the ongoing need for external validation of fiscal policy.

It was suggested that much of modern economic governance stems from concerns that politicians cannot be trusted to manage economies responsibly. It was argued that the shift towards independent monetary and fiscal institutions arose from fears that governments would consistently overspend and participants advised that fiscal policy should be designed to balance responsibility with adaptability, ensuring stability while allowing for necessary adjustments in response to economic conditions.

Participants noted that fiscal rules have been in place in the UK since 1997, in contrast to broader and more flexible fiscal standards. However, it was suggested that the current fiscal framework is not functioning effectively, with several key issues emerging. Short-term measures to meet fiscal targets, such as asset sales or adjustments to benefit schemes, distort long-term financial planning. Rigid constraints make it difficult for governments to balance investment needs with fiscal targets. Additionally, political reluctance to either raise taxes or significantly cut spending has resulted in fiscal gridlock.

Are fiscal rules effective and are they rational?

Do they effectively constrain government spending? Are they a response to a lack of government confidence? Are they counterproductive?

Participants asked whether fiscal rules genuinely constrain government spending. Historically, the UK managed high debt levels following the Second World War while implementing large-scale public spending initiatives, such as the creation of the NHS and the expansion of the welfare state. It was suggested that the issue today is not debt itself but a lack of confidence with governments no longer trusting themselves to take bold actions. As a result, fiscal rules have become a way to impose external discipline on economic policy.

Participants suggested that fiscal rules are often used to maintain credibility, particularly with financial markets. Labour governments, for example, have historically relied on strict rules to reassure investors, with Harold Wilson using external economic constraints to manage internal political pressures. It was suggested that similar motivations continue to shape fiscal policy today. However, concerns were raised about the role of unelected institutions such as The Office for Budget Responsibility (OBR), with some arguing that they now exert quasi-political influence rather than serving solely as economic forecasters.

It was suggested that while fiscal rules provide clarity, they may also restrict necessary economic action. The UK’s response to crises such as COVID-19 and the 2008 financial crash demonstrated that governments can act decisively when required. Participants argued that the focus should not be solely on meeting fiscal targets but on whether the government is pursuing an effective economic strategy. The challenge lies not in the existence of fiscal rules themselves but in the broader economic and political environment in which they operate.

Participants also questioned whether current fiscal rules remain rational in today’s economic climate. In the US, mechanisms such as the Byrd Rule, budget reconciliation, and the debt ceiling were designed for specific historical contexts but now serve different functions. It was suggested that rigid deficit reduction targets during economic downturns may be counterproductive, as cutting fiscal policy in response to falling growth can worsen economic conditions. With persistent low growth in contrast to previous decades, participants argued that governments have spent years avoiding difficult decisions, but there are now fewer options left to maintain the status quo. The challenge is how to adapt fiscal rules to reflect the realities of a stagnating economy.

Fiscal Rules vs Fiscal Standards

Fiscal headroom, fiscal councils, fiscal auditors

Participants highlighted the ongoing debate between fiscal rules and fiscal standards, questioning whether rigid constraints are necessary or whether a more flexible approach should be adopted. Governments frequently revise fiscal rules to reflect changing economic conditions. Rather than focusing on specific numerical targets, some argued that fiscal policy should be guided by fundamental economic principles.

Participants noted that academic research has cast doubt on the effectiveness of existing fiscal rules. The Maastricht criteria, for example, have been criticised for being inflexible and often failing to function as intended. It was suggested that fiscal headroom is frequently overstated, with historical analysis from the OBR showing that previous chancellors typically maintained a far greater margin than current claims suggest. This raises questions about whether the government is likely to meet its fiscal targets or whether these targets are primarily political constructs rather than genuine economic constraints.

Participants argued that the real issue is not necessarily replacing fiscal rules but refining how they are used. It was suggested that an independent body, such as the OBR, could play a greater role in assessing the probability of achieving fiscal targets rather than simply reporting whether they are met. This would formalise what is already widely understood; that fiscal rules often serve as political tools rather than absolute constraints. The role of an independent ‘fiscal auditor’ was also discussed, with some arguing that a body within the Treasury could oversee fiscal sustainability in a more realistic and adaptable manner.

It was also suggested that private-sector companies rarely impose rigid financial rules on themselves, instead relying on flexible guidelines. Participants highlighted examples from financial markets where investor confidence often depends more on sentiment than strict rule compliance. This raises the question of why governments continue to adhere to arbitrary fiscal rules when markets are capable of understanding broader economic conditions. The primary driver, it was argued, is political optics with missed fiscal targets framed as failures in the media, forcing decisions based on perception rather than economic logic. A potential alternative could be a ‘fiscal council’ tasked with evaluating debt sustainability rather than enforcing rigid numerical targets, offering a more pragmatic approach to fiscal policy.

The growth problem

Adapting to economic realities, embracing instability, skills shortages, an unreliable environment for long-term investment

Participants emphasized that one of the key challenges to growth is the government's reluctance to adapt to economic realities, instead prioritizing pre-election promises and arbitrary fiscal constraints. It was noted that while growth was strong in early 2024, the government failed to capitalise on this momentum. Comparisons with other European economies suggest that while they have managed to sustain growth, in the UK, economic stagnation persists. Some argued that a return to boom-and-bust cycles could be necessary, as periods of rapid growth improve sentiment and social mobility, while downturns, though painful, often drive essential economic restructuring.

It was suggested that while instability should not be embraced for its own sake, excessive risk aversion has led to stagnation; characterised by low growth, demographic challenges, and weak investment. However, participants argued that a return to uncontrolled economic cycles would not be desirable, pointing to the high inflation and instability of the 1970s. Today, institutions like the Bank of England have managed inflation more effectively, even when it reached 40-year highs, avoiding the severe unemployment spikes of previous decades.

Participants noted that while unemployment remains relatively low, this masks deeper structural challenges, particularly in skills shortages. Many businesses struggle to expand due to a lack of skilled workers, with the defense sector serving as a key example. If the government intends to drive growth through defense investment, questions remain about where the necessary workforce will come from.

It was argued that the UK has become an unreliable environment for sustained business investment. Companies require stable policies, clear skills pipelines and economic predictability, none of which are currently in place. Without growth, every policy decision becomes focused on managing decline rather than encouraging expansion. Participants suggested that without a coherent strategy for sustainable growth, economic policymaking will remain reactive, centered on short-term crisis management rather than long-term development.

Will AI help or hinder economic growth?

What does the business environment need to ensure AI contributes positively?

Participants highlighted that for AI to drive economic growth, investment in education, research and skills is essential. However, it was suggested that the UK’s business sector is currently too weak to absorb new technologies effectively. The high costs associated with AI implementation, combined with regulatory uncertainty, could deter firms from adopting AI-driven solutions.

Participants argued that AI is already reshaping the workforce, with some industries cutting jobs while others create new roles for those who can work alongside AI. In financial services, for example, AI has reduced the need for junior banking roles. However, it was suggested that this could pose long-term risks, as fewer entry-level positions mean fewer opportunities for new talent to develop the experience required to replace senior professionals in the future. AI, while powerful, cannot replicate human intuition, industry expertise or relationship-building skills.

What are the solutions?

Shifting industrial capacity, the culture of work, tax increases, devolution and governance

Participants highlighted the challenge of shifting industrial capacity, particularly given the decline of the UK’s manufacturing base and shortages of skilled engineers. It was argued that a limited pool of engineering talent poses a major constraint, exacerbated by a lack of prioritization of STEM education and insufficient apprenticeships. Comparisons were drawn to past periods of rapid industrial change, such as the 1930s and 1940s, raising the question of whether the UK government has the capacity or political will to implement such shifts today.

Participants suggested that the defense sector, particularly the space industry, presents a major growth opportunity. The UK already invests significantly in space capabilities, and recent projects have demonstrated its potential as a key export market. However, concerns were raised about the UK’s fragmented approach to defense procurement, with each military branch operating independently, leading to inefficiencies and delays.

The shifting nature of work was also a key focus. Participants emphasized that automation and AI are reshaping career structures, reducing opportunities for junior employees to develop the skills needed for leadership. Remote work has further complicated career progression, as mentorship and informal learning opportunities have declined. It was suggested that while higher wages can drive investment in automation, excessive regulation could discourage business innovation. Balancing labor rights with economic flexibility remains a complex challenge.

On taxation, it was noted that while the government has ruled out broad tax increases, there are areas where additional revenue could be raised. Participants pointed to gaps in the tax structure, such as the absence of National Insurance contributions for certain high-earning professionals and the lack of an exit tax for businesses relocating abroad. Historical examples, such as windfall taxes on banking profits during periods of high interest rates, were cited as potential models. It was argued that making tax increases more transparent, rather than relying on fiscal drag, could improve public understanding and acceptance of taxation.

Devolution was suggested as another potential solution, with local authorities being given more control over revenue-raising measures. Participants highlighted that the UK remains highly centralized, limiting the ability of local governments to address regional economic challenges effectively. Property taxation reform, including a shift towards a land value tax, was also discussed as a means of creating a fairer and more efficient system.

Governance concerns were raised, with participants arguing that Number 10 has increasingly outsourced economic policy decisions to the Treasury, leading to a short-term, election-driven approach. The strengthening of the Office for Budget Responsibility (OBR) as an independent body was contrasted with the increasing political control over NHS England, suggesting a lack of strategic coherence. It was suggested that long-term economic stability requires not only better policy but also more effective implementation, which remains a persistent challenge for UK governance.

Contributors to the discussion included:

  1. Arun Advani, Director, Centre for the Analysis of Taxation
  2. Rob Calvert Jump, Senior lecturer in the School of Accounting, Finance and Economics, Greenwich University
  3. Mubin Haq, Chief Executive, abrdn Financial Fairness Trust
  4. Jonathan Haskel, Professor of Economics, Imperial College Business School
  5. Becky Holloway, Programme Director, Jericho
  6. Ali Kennedy, Chair, Confederation of British Industry (CBI) Tax Committee
  7. Neal Lawson, Partner, Jericho
  8. Nick Moore, Managing Director, Stifel
  9. David Murray, Head of Tax Policy & Sustainability, Anglo American
  10. Vicky Pryce, Chief economic adviser and board member, Centre for Economics and Business Research (CEBR)
  11. Tim Sarson, UK Head of Tax Policy, KPMG
  12. Bartek Staniszewski, Head of Research, Bright Blue
  13. Professor Tony Travers, Director, Institute of Public Affairs at the LSE
  14. Grant Wardell-Johnson, Global Tax Policy Leader, KPMG International