A new fiscal framework to renew Britain

For too long, people in our country have felt powerless. Since the Global Financial Crisis, living standards in the UK have stagnated.¹ Brexit scarred our economy while dividing our communities, and was soon followed by the hits to our public and personal finances produced by the pandemic and Putin’s invasion of Ukraine. Labour entered government in 2024 against this backdrop, and has since had to deal with numerous shocks to energy markets and the world trading system.

None of this is new, but it bears repeating – because it defines the stakes of the challenges that we face today. Our economic institutions and fiscal framework are designed for short-term firefighting when long-term renewal is required.

A new economic model 

Central to our economic and political turbulence is that our model of growth, largely unchanged since Margaret Thatcher, has run aground. The state’s capacity to play an active role in economic development was hollowed out, replaced by a framework that prioritised market allocation while limiting political discretion. Over time, this has produced an institutional settlement in which governments are held responsible for economic outcomes but lack the tools to shape them effectively. The result is a persistent gap between political expectation and economic delivery, reflected in weak productivity growth, stagnant living standards, and deepening regional inequalities.

This is not a uniquely British phenomenon. Across advanced economies, similar trends have emerged as states retreated from direct economic coordination and relied more heavily on liberalised markets and complex regulatory regimes. For a time, globalisation helped to mask these weaknesses, sustaining growth despite declining domestic investment and state capacity. But since the Global Financial Crisis, that model has come under increasing strain. As growth has slowed and volatility has increased, the limits of this approach have become more visible – and politics has begun to catch up with the reality that existing economic frameworks are no longer delivering rising living standards or broad-based prosperity.

So, we must look to reduce regulatory barriers, especially those that are holding back new and innovative businesses wishing to scale up. We have incredible strengths in high value sectors across every part of the UK, and we should not be afraid to back them. Industrial strategy sceptics need only look at the strength of our financial services to see what can be achieved with coherent regulatory strategy and consistent economic development. In John Fingleton’s review of nuclear regulation, we have a model for how we can strip back rules which do not serve us in an industry which offers massive opportunities to places like Sheffield.² We could match this ambition in areas like biotechnology, advanced manufacturing, and the creative industries.

The constraints on building new homes and the transport infrastructure that links people to opportunities that match their ambition and talent has stifled growth across the country and limited our advantage in key productive sectors. What’s more, it has created unforgivable social harm with 170,000 children currently homeless in England.³ The Government’s existing planning reforms are not a peripheral issue, but central to any credible growth strategy. For as long as we have warehouses being built in London in place of housing, we must double down and go further on reform.

The failure to invest over decades, whether in housing, energy, or transport, and the constraints we have applied to the investment that does happen, have together made us poorer and left us more vulnerable to inflation. The UK remains persistently underinvested relative to comparable advanced economies, with public investment levels historically around 2-3% of GDP. This is well below those of many OECD peers, where investment has often been closer to 3-4% of GDP, leaving the UK near the bottom of the G7 on this measure.⁴ This underinvestment by the public sector is mirrored in the private sector. The consequence is that we are not only failing to close the gap with our competitors, but actively entrenching weaker growth prospects over time. 

British myopia

We cannot hope to address this prolonged underinvestment unless we reform the thinking at the heart of our economic institutions 

A central weakness in the UK’s economic model is the systematic undervaluation of what might be termed “preventative” investment – spending that reduces future fiscal pressures while raising long-term growth. Our institutions, appraisal frameworks, and political incentives are poorly configured to recognise these benefits, tending instead to favour interventions with immediate, easily measurable returns. Rather than prioritising investments and supply-side reforms that expand the productive capacity of the economy and lower long-term costs, policy has too often defaulted to short-term savings. By contrast, social and council housing, childcare, and skills provision are intrinsically long-term bets but act as powerful economic multipliers - increasing productivity, labour market participation and reducing demands on the state over time.⁵

At the heart of our economic policymaking is a tension, between having to prove our credibility to the financial markets who lend us money, and delivering change to the electorate that put their trust in us in 2024. In practice, this tension has historically been mismanaged, leading  to a pattern in which governments prioritise meeting near-term fiscal targets over delivering long-term economic improvements. For example, when faced with deteriorating forecasts, Chancellors, with the notable and welcomed exception of Rachel Reeves, have repeatedly chosen to scale back or delay public investment - particularly in infrastructure, housing, and local growth programmes - in order to preserve a narrow margin of “headroom” against their fiscal rules. While this may reassure markets in the short term, it weakens the very growth prospects on which fiscal credibility ultimately depends. The result is a cycle in which credibility is pursued through short-term restraint, but undermined by the long-term stagnation that follows. This is the definition of managed decline.

This is not an attack on our fiscal rules. The primary constraint on public investment today is not in any government’s gift to change: it is the cost of borrowing itself.⁶ After the disastrous Liz Truss mini-Budget, markets have become more sensitive to UK fiscal credibility – not only because they perceived a lack of seriousness in the way we conducted economic debates in this country, but also because it drew attention to the structural weaknesses in our economy. 

These weaknesses are downstream of decisions taken by the very institutions that claim to want to foster economic growth, but who have been found wanting time and again since the financial crisis. This means that there is no route out of the current economic malaise that does not involve looking at the role and mandate of organisations such as the Office for Budget Responsibility, the Treasury, and the Bank of England. 

It is therefore possible for two things to be true at once: that the current institutional framework is ill-suited to supporting long-term growth, and that the immediate constraint on government action is the cost of borrowing in financial markets. A credible reform agenda must address both – improving the framework over time while demonstrating, in the near term, that public investment will strengthen, rather than weaken, fiscal sustainability.

Since 2008, we have embedded an austerity mindset into the very structures of our economic policymaking. The 2010s obsession over the exact size of the budget deficit meant that an organisation dreamed up by the Tories in opposition aided and abetted the dismantling of investments like Sure Start because it determined that there were no costs to cutting them, only immediate savings. We now know that Sure Start centres, for example, delivered £2 of savings for every pound spent – yet their closure under Osborne was never flagged as a fiscal risk.⁷ Nor, ultimately, did such moves help eliminate the deficit, and our public debt has now ballooned to over 96% of GDP. 

The sole reliance on rolling five-year forecasts embeds short-termism into our decision-making.⁸ Investments whose benefits accrue beyond this window are deprioritised, while spending cuts that generate immediate savings are favoured.⁹ The result is a pro-cyclical bias in fiscal policy and a persistent tendency toward underinvestment. Long-term investment is systematically undervalued.¹⁰

There are biases too within the investment that is made. Areas of the country that need development are overlooked for funding because those projects cannot compete with London and the South East on value for money grounds. This leads further entrenches disparities among regions, and widens the gulfs between the life chances of people across the UK. This is not simply a technical flaw, but a political one: it entrenches spatial inequalities by systematically disadvantaging projects in areas where returns are longer-term but no less real.

In this, the role of the Treasury is key. The concentration of fiscal authority within the Treasury reinforces this short-termism. Faced with the dual mandate of maintaining fiscal control and supporting economic growth, the institution defaults toward caution, prioritising near-term debt dynamics over longer-term economic outcomes.

Furthermore, we are facing extremely high gilt yields in part because of structural features of the UK’s debt stock. Decisions taken in the 2010s – most notably the large-scale issuance of inflation-linked gilts under George Osborne – have left the UK unusually exposed to inflation shocks, creating an inflation-sensitive debt structure that now costs the Exchequer billions each year. This has led to a government like ours with a clear mandate finding itself with one hand tied behind its back because of the disastrous decisions taken by Osborne. 

Crucially, these institutional dynamics do not operate in a vacuum. In a context of elevated borrowing costs, they amplify rather than alleviate the underlying constraint, limiting the government’s ability to respond effectively. Higher borrowing costs raise the threshold that public investments must meet to be considered fiscally sustainable. As a result, fewer projects appear to ‘pay for themselves’, even where their long-term economic returns remain substantial.

In short, the problem is not just policy choices, but the framework shaping them.

A revised fiscal framework

The question is not simply what the optimal fiscal framework looks like, but how reform can be sequenced in a context of elevated borrowing costs and heightened market sensitivity.

The first step is to move away from five-year forecast windows to a longer horizon of ten years. As I have written before, this will help rebalance incentives from short-term cuts by increasing the visibility of the benefits of sustainable investment, making it harder to invent fiscal fictions, and better rewarding supply-side and tax reform. In doing so, it will also increase transparency for investors and show that the UK is serious about fiscal sustainability.

Evidence suggests that public investment reaches a ‘breakeven point’ for the Exchequer within a relatively short period of time, with higher tax receipts offsetting initial costs after only a few years, and generating net fiscal returns over a longer horizon. A fiscal framework anchored to a five-year window is therefore structurally incapable of capturing these effects, biasing decision-making against projects whose benefits accrue over time. It would allow projects that generate long-term returns to be properly accounted for, and reduce the pressure for repeated short-term consolidation.¹¹

This is not a means of kicking the can of consolidation down the road. We must stay the course on reaching a balanced current budget or surplus for the first time since 2001. This is crucial to mending Britain’s reputation and rebuilding our resilience to future shocks. It is also only fair to future generations, and honest with the public about what it costs to run our country. Only once we have achieved this can we look to further reform our fiscal rules.

At that stage, we should reform the debt targets from the current three- and fiveyear rolling windows to a longer horizon of ten years. To truly deliver renewal we need to have the confidence to seek funds from the markets to deliver on projects that will bear fruit beyond a given Parliament. For example, to deliver a new fleet of gigawatt nuclear reactors, and to do so in a way which can establish local supply chains and achieve programme efficiencies, is a two- or three-decade endeavour. 

Crucially, this would not weaken fiscal discipline: the Office for Budget Responsibility would continue to independently assess the fiscal and economic impact of investment decisions, including their effect on debt sustainability over the longer term. A longer horizon would therefore improve, rather than undermine, the credibility of the framework by aligning it more closely with the real dynamics of growth and public finances, as has been argued by a number of leading fiscal experts.¹²

We must also make clear that we will no longer make short term decisions to hit some arbitrary target in the future. Cutting capital investment in the 2010s was one of the cardinal sins of the Conservative-Lib Dem Coalition – one that even George Osborne now admits to – and we must more clearly ringfence this investment during fiscal consolidation. We must begin to treat investment as a central part of our fiscal strategy, and not merely as residual spending once all else has been allocated. 

Finally, we must reduce our reliance on rigid, point-in-time targets which are highly sensitive to small changes in forecasts, distorting policy decisions by creating a misleading sense of precision.¹³ Moving towards rolling targets or fiscal principles, and shifting away from the much maligned ‘headroom’ figure towards overall public spending sustainability, would substantially improve policymaking. 

There is a genuine trade-off. If not carefully handled, reforming the 

Government’s fiscal approach in a period of market volatility risks undermining credibility. Yet maintaining the current framework risks locking in underinvestment and weak growth. The question is therefore not whether to reform, but how to do so in a way that strengthens, rather than weakens, market confidence. Ultimately, a framework that suppresses growth may weaken, rather than strengthen, fiscal credibility.

The role of our economic institutions

Fiscal reform alone, however, is insufficient without institutional change, since the current institutional architecture is increasingly misaligned with the demands of long-term economic strategy.¹⁴

On the one hand, the Treasury combines responsibility for fiscal control with a nominal mandate to promote growth – creating an inherent tension typically resolved in favour of caution. There is a reason why no other country in the world has such an imperial finance department as we do. On the other hand, despite ever more presidential politics, we have an underpowered Downing Street, in which the Prime Minister needs the agreement of the Chancellor to push ahead with the priorities on which they were elected. 

We must therefore reopen the discussion of removing the growth mandate from the Treasury, while creating an economic development ministry capable of coordinating across Whitehall. Opponents will say that only the Treasury has the power to corral other departments into thinking about growth. I would gently point to the anaemic growth figures since 2008 as a sign that maybe we should not expect our Chancellors to be able to do it all. Passing the public budgeting function to a beefed-up Number 10 would also ensure that at every spending round, the Prime Minister would be empowered to set departmental budgets based on his or her priorities for the upcoming three-year cycle. There is a strong case for separating these functions, and for strengthening a central economic strategy capability (whether in a reformed Treasury or a dedicated growth ministry), while also ensuring that fiscal discipline remains robust. 

Alongside this, we should enable the newly established National Wealth Fund to borrow against their existing balance sheet outside of the fiscal rules.¹⁵ This would separate long term investments in areas like renewable energy from day-to-day government spending, and would alleviate the fiscal pressures experienced by the Exchequer. It would bring the UK closer to international best practice, and would enable investment at scale without undermining fiscal credibility. Specifically, this would support increased investment in strategic, growth-generating sectors – such as clean energy, advanced manufacturing, and critical infrastructure – where the UK needs to crowd in private capital and rebuild its industrial base. A core function of the Fund should therefore be to take on greater risk in areas where private markets are unwilling to invest at the necessary scale, thus addressing persistent financing gaps and catalysing wider economic activity. Crucially, this would not represent a departure from fiscal discipline: investment decisions would be governed by clear mandates, strong oversight, and transparent reporting, with returns expected to materialise over the medium to long term – consistent with a longer fiscal horizon and the objective of strengthening the public balance sheet. 

The Chairs of Legal & General, Aviva, and the Universities Superannuation Scheme have similarly argued that the development corporations tasked with building New Towns and developing the Oxford-Cambridge Arc must be permitted to borrow outside of the fiscal rules.¹⁶ Their argument reflects a broader point: where projects generate long-term, asset-backed returns – such as land value uplift in large-scale housing and infrastructure schemes – constraining them within short-term fiscal targets not only limits delivery but also deters the private capital that could otherwise be mobilised alongside public investment.

Finally, we must better coordinate fiscal and monetary policy to avoid the Bank of England pursuing policies that actively damage the government’s balance sheet. At present, decisions such as Quantitative Tightening – where the Bank sells government bonds back into the market – can increase the cost of borrowing for the Exchequer just as the Treasury is seeking to finance investment. This reflects a broader institutional gap. While monetary and fiscal authorities are formally independent, their actions are deeply interdependent in practice, but coordination remains limited. 

This is not an argument against central bank independence, which rightly retains widespread support. Rather, it is a call for recognition that the interaction between monetary and fiscal policy has significant implications for public finances, and that there is therefore a case for revisiting aspects of the institutional framework to ensure better coordination between the two.¹⁷ As we approach the 30^th anniversary of Gordon Brown giving the Bank operational independence to set interest rates, the time is right to re-examine the mandate and see whether better coordination and a greater focus on economic growth should also be included. 

Reform vs stagnation

The status quo is not sustainable. A Labour government with a mandate to pursue a decade of national renewal must reshape the state to deliver on its electoral promises. This is not to say we should disregard the bond markets or pursue reckless borrowing – far from it.  I am very conscious, having sat in Cabinet after the election, of the dire state of the public finances that we inherited. But the continuation of the current system will only lead to further stagnation.  

The current fiscal framework is unfit for purpose and unable to deliver the economic renewal we in the Labour Party believe our country needs. The status quo is not a neutral baseline – it is a path to continued stagnation. Longer time horizons, new and better empowered institutions, and a greater investment capacity for those parts of the state that already exist should be the building blocks of a credible growth plan that would in turn buy us trust from the markets. 

The task is not to abandon fiscal discipline, but to redefine it, so that it supports, rather than constrains, the long-term renewal the UK economy urgently needs. Our goal is simple. A new framework that delivers growth, resilience, and visible improvements in living standards across the country can and should be how this Labour Government makes good on its promise of ‘change’. In July we will have been in office for two years. We cannot afford to wait any longer before we change the system we inherited and start writing a new chapter in the economic history of our country.

Louise Haigh has been the Labour MP for Sheffield Heeley since 2015. 

Notes

1. Resolution Foundation, ‘Britain’s great living standards slowdown has left typical family incomes growing by just £140 a year since 2010’, www.resolutionfoundation.org, 28 June 2024.
2. Department for Energy Security and Net Zero and Ministry of Defence, ‘Nuclear Regulatory Review 2025’, www.gov.uk, 24 November 2025.
3. Shelter, ‘Number of children homeless in England the highest since records began’, www. england.shelter.org, 16 October 2025.
4. Office for Budget Responsibility, ‘International comparisons of government investment’, www.obr.uk, March 2020.
5. Olivier Blanchard and Daniel Leigh, Growth Forecast Errors and Fiscal Multipliers, International Monetary Fund, January 2013. 
6. International Monetary Fund, Fiscal Monitor: Putting a Lid on Public Debt, International Monetary Fund, October 2024; Office for Budget Responsibility, Economic and Fiscal Outlook, Office for Budget Responsibility, October 2024.
7. Pedro Carneiro, Sarah Cattan, Gabriella Conti, Claire Crawford, Christine Farquharson, and Nick Ridpath, The Short- and Medium-Term Effects of Sure Start on Children’s Outcomes, Institute for Fiscal Studies, May 2025.
8. Joseph J. Minarik, Fiscal Risks, Fiscal Sustainability and Rethinking Fiscal Rules, OECD, June 2024.
9. ‘IFS Green Budget 2024: Full Report’, www.ifs.org.uk, 10 October 2024; Thomas Pope, Peter Hourston, and Shaina Sangha, ‘Current UK fiscal rules’, www.instituteforgovernment.org.uk, 19 November 2024.
10. Andrew M. Warner, Public Investment as an Engine of Growth, International Monetary Fund, August 2014; Jean-Marc Fournier, The Positive Effect of Public Investment on Potential Growth, OECD, 2016; George Dibb and Luke Murphy, ‘Now is the time to confront UK’s investment-phobia’, www.ippr.org, 20 June 2023.
11. Andy King, Reflections on Fiscal Targetry and Long-Term Sustainability, Office for Budget Responsibility, 2022; Jagjit S. Chadha and Adrian Pabst, Designing a New Fiscal Framework: Understanding and Confronting Uncertainty, National Institute of Economic and Social Research, 2021.
12. Julien Acalin, Virginia Alonso, Clara Arroyo, Raphael Lam, Leonardo Martinez, Anh Dinh Minh Nguyen, Francisco Roch, Galen Sher, and Alexandra Solovyeva, Fiscal Guardrails against High Debt and Looming Spending Pressures, International Monetary Fund, September 2025. 
13. Gita Gopinath, A Strategic Pivot in Global Fiscal Policy, International Monetary Fund / Central Bank of Ireland, September 2024; International Monetary Fund, Fiscal Policy under Uncertainty, International Monetary Fund, April 2025.
14. Iain Begg, Rethinking the UK fiscal framework: lessons from elsewhere, London School of Economics European Institute, 2025.
15. OECD, National Development Banks and Public Investment, OECD, 2018. 
16. ‘Rachel Reeves warned to relax fiscal rules to avoid ‘massively inhibiting UK growth’, GB News, 8 February 2026.
17. Office for Budget Responsibility, The Fiscal Impact of Monetary Policy, Office for Budgetary Responsibility, 2024.