What are the chancellor’s fiscal rules and could they be set to change again?

Archie Mitchell looks at the rules Rachel Reeves has set for herself, and asks whether they can survive in the face of Donald Trump’s aggressive ‘America first’ agenda

Just days after the chancellor’s spring statement balancing act saw her squeak back into line with her fiscal rules, Donald Trump took a bazooka to the global economic order on which the constraints are based.

Rachel Reeves had boosted economic growth here, cut spending there, and forecasts from the Office for Budget Responsibility (OBR) placed her back on course to comply with her self-imposed targets.

But the official spending watchdog had already warned that a trade war sparked by the US president would knock her back off track, and discussions are already underway about how Reeves can make the sums work in time for a full-fat Budget this autumn.

Chancellor Rachel Reeves has set herself strict fiscal rules (PA)

What are the fiscal rules?

The chancellor’s fiscal rules dictate that she cannot borrow to fund day-to-day spending, and that debt must be falling as a share of national income by the end of a five-year forecast period.

They are in place to instil confidence in the markets that ministers are firmly in control of the public finances – and that Britain will be able to comfortably pay its debts.

Can the chancellor change or scrap them?

The fiscal rules were introduced in 1997 and applied for more than a decade in their first iteration. They have been changed nine times since then – most recently by Reeves herself in October last year, when she moved her focus to maintaining a current budget balance between -0.5 per cent and +0.5 per cent of GDP rather than following Jeremy Hunt’s previous rule, which specified that borrowing must be kept below 3 per cent of GDP.

The chancellor also distinguished between borrowing for investment and borrowing for day-to-day spending, a move that was welcomed at the time by economists and the Institute for Government.

So tweaks can be made to allow the chancellor varying degrees of wriggle room. The ultimate barrier is the extent to which Reeves can change the rules while maintaining the confidence of the markets.

But no chancellor will scrap the fiscal rules altogether. Not only would doing so spook investors, it would prove politically toxic for whichever party chose to do it.

Why hasn’t Reeves made further changes?

The chancellor was urged before her spring statement last month to tweak the fiscal rules rather than attempt to balance the books on the backs of benefit claimants. But Reeves chose the latter.

Not only is the Treasury worried about the political optics of being seen to shift the goalposts: it is concerned about the way any changes would be received by the financial markets.

No change would prove as toxic as Liz Truss and Kwasi Kwarteng’s approach to the public finances, which saw the former PM and her chancellor produce a mini-Budget with no accompanying forecasts from the OBR.

But Institute for Fiscal Studies director Paul Johnson has warned that the rules “are about as loose as is reasonable”, and said: “We’ve seen how jittery the markets are.”

But is a tweak on the way?

There has been a decisive shift in the government’s language on the economy since Trump’s tariff war began.

Keir Starmer had previously talked about the world entering a “new era” for defence and security; he now talks about being in a new era for trade and the economy.

The prime minister could be laying the groundwork for a major change, similar to that seen in Germany, against the backdrop of what he has called a new economic order.

Whatever the PM is planning, his change of tone suggests that a big change in approach is on the way.