Client Update - 30th May 2025

Britain’s fiscal fiddling has come to the attention of the International Monetary Fund (IMF). On Tuesday, in its annual health check of the UK economy, the IMF recommended “refinements” to the UK’s fiscal framework to change the frequent tweaking. The government should heed its advice. Surely it is time that spending plans ought to adapt to substantive changes in the interest rate, inflation, or growth outlook.

When the Labour party took power last July, Prime Minister Sir Keir Starmer said that his government would promote economic “stability.” Yet its approach to managing Britain’s public finances has so far been rather haphazard. After chancellor Rachel Reeves left only a slim £9.9bn headroom against her main fiscal rule to balance the current budget, updated economic forecasts forced her into making £14bn in hasty spending cuts to restore the buffer at March’s Spring Statement. In recent weeks, long-term UK gilt yields have pushed higher. To avoid breaking Reeves’ rules, economists now project that further cutbacks, or revenue-raisers, will be necessary at the Autumn Budget.

Long term stability needs to be the focus; however, plans should have the flexibility to adapt to a changing market environment, not just sticking to a rigid fiscal rule without paying heed to global turmoil and external factors. Regularly changing departmental budgets and taxes undermines the clarity that households and businesses need to plan ahead. Quick adjustments to meet fiscal rules also raise the risk of bad policymaking. Earlier this year, the government also sensibly passed a “Charter for Budget Responsibility,” which enshrined the importance of independent assessments by the fiscal watchdog and Labour’s campaign promise to move to only one “major” fiscal event per year. Yet even that did not stop the government from making hefty last-minute cuts to welfare spending in March, ahead of the main Budget planned in the autumn.

How can the chancellor avoid fiscal tinkering in the future? It would surely make sense that fiscal rules should be assessed only once per year at the Budget. This would reduce pressure on the government to make policy changes at its Spring Statement. That said, any changes here must consider the important role the OBR’s forecasts play in providing independent information to financial markets about the public finances. Better yet, the government can make clear that small breaches of the fiscal rules do not require policy changes outside of the main fiscal event.

Rachel Reeves was back in the news again this week as she confirmed she will create a “backstop” power to force large pension funds to back British assets, as she vowed to unleash more than £50bn of investment in domestic infrastructure, housing, and fast-growing businesses. We will not know the detail until we see the new pensions legislation later in the year. The Treasury said on Thursday: “The government will take a reserve power in the Pension Schemes Bill to set binding asset allocation targets.” Officials confirmed this could include specific allocation targets for UK assets. It is the first time the Treasury has publicly confirmed it will legislate to create a backstop power to mandate pension funds on their investment strategy — a move condemned by the Conservatives. Reeves’ allies say she believes the power will not be needed and that reforms in the new pensions legislation — plus a “Mansion House accord” with the industry — would deliver the desired results.

At the heart of the reforms is a requirement for all multi-employer defined contribution (DC) pension schemes and local government pension scheme pools above £10bn in size to work towards operating as pooled “megafunds”, similar to those in Australia and Canada. This will not impact on our clients’ pensions that we manage for them. A DC scheme simply means that the final pension the member receives is based on the fund value at the time – different to defined benefit schemes that provide a pension based on average earnings and how long you have paid into the scheme.

The Treasury argues that the megafunds will drive more than £50bn of investment in big UK infrastructure and other British assets. However, after pushback from some industry participants to plans presented last autumn, the Treasury said schemes worth more than £10bn that are unable to reach the minimum size requirement by 2030 will be allowed to continue operating, as long as they can demonstrate a clear plan to reach £25bn by 2035.

The UK has about 60 multi-employer DC pension schemes, with combined assets forecast to reach £800bn in five years. Meanwhile, under a Mansion House accord signed this month, 17 of the UK’s largest pension providers have pledged to invest at least 5 per cent of their default funds in private British assets by the end of the decade. The Treasury said the Mansion House pact would release £25bn for UK investment by 2030, while a similar amount would come from local investment targets from local government pension schemes.

This plan is not universally popular, as Shadow chancellor Mel Stride stated - “By pressing ahead with their plans to mandate pension-fund investments, Labour is crossing the Rubicon into directing the public’s savings. This is an extraordinary over-reach.”

British assets do need support, and starting with domestic investors is sensible, although with pensions falling into savers estates for Inheritance Tax from 6th April 2027 and labour already talking about bringing back the lifetime pension allowance tax charge, careful thought needs to be given to turning off people’s appetite to save at all.

I am not sure I have delivered the cheerier update I promised last week, but these matters have been playing on my mind. It did make me smile a little when I read Wednesday’s ruling from the Court of International Trade saying Donald Trump had wrongly used the International Emergency Economic Powers Act to slap tariffs at will on trading partners. Markets did perk up again at this surprising news given the extent to which courts generally defer to the executive on national security issues, so it’s a dramatic and largely unexpected interruption to one of his most important policies. Obviously, this is not the end of it and will only serve to delay the UK-US deal whilst the matter is appealed in the courts. The so-called section 232 tariffs on cars and steel are unaffected by the ruling and Trump will not just appeal this decision to the federal circuit court; beyond that he has a pliant Supreme Court waiting for him if need be, and there are other obscure pieces of decades-old legislation he can dust off to resume his tariff campaign. It does, though, underline that his trade policy is not just ludicrous in substance but vulnerable to events, be they the courts or the financial markets, or in this case the two contriving to work in tandem. Having written this last part, I do now feel a little happier, I hope you do as well. Markets are grinding back up once more and 2025 is currently looking like another good year for investors. Do have a good weekend.