Budget: IfG says fiscal rules change opens door to new risk

Think tank supports Rachel Reeves' approach but cautions of danger with switch to PSNFL as a measure of debt
Rachel Reeves Photo: Parliament UK

By Jim Dunton

04 Nov 2024

Chancellor Rachel Reeves' decision to change the government's fiscal rules in the Autumn Budget will stop "gaming" perpetrated by previous administrations but creates new potential for abuse, the Institute for Government has warned.

Gemma Tetlow, chief economist at the think tank, said many of last week's changes – the ninth revision to fiscal rules in 16 years – were in line with earlier IfG proposals and "should support better and more stable policy making".

However Tetlow said changing the measure of debt – from public-sector net debt, excluding the Bank of England’s balance sheet, to PSNFL, short for public sector net financial liabilities – removed old problems "but creates other risks".

The move has been touted as potentially freeing up £50bn in extra investment.

Tetlow said public-sector net debt did not incorporate the value of long-term financial assets held by the government, with the value of future repayments on loans made to the private sector being one example. She said the situation could incentivise the selling-off of long-term assets, even when done below market value. Tetlow cited 2017's sale of the student loan book as an example.

She said the switch to PSNFL recognised the value of long-term financial assets and avoided the problem of longer-term assets being sold off in a bid to game the system and make it look like public indebtedness had shifted.

Nevertheless, Tetlow said adopting PSNFL as the main measure of debt for the fiscal rules meant the "margins for potential gaming" shifted elsewhere.

"The government will now face a strong incentive to channel money through forms structured as financial assets (which will net off in PSNFL), rather than investing directly in physical assets (which would not)," she said. "There may be occasions when the former approach makes sense – and is, indeed, the motivation behind the creation of the National Wealth Fund – but sometimes it will not.

"The government needs to make sure its decisions are not skewed by a focus on the accounting treatment of different approaches."

In her analysis, Tetlow said Reeves' plans to draw a clear distinction between borrowing for investment and borrowing for day-to-day spending in the revised fiscal rules were a "positive step".

She said targeting current budget balance, rather than the previous rule of targeting borrowing below 3% of GDP, would allow for a more stable approach to investment spending.

"It reduces the ability for the government, when money is tight, to simply cut investment spending, which people do not notice for many years," she said. "This is something many previous governments have done, including the last one."

Tetlow said the chancellor had "tested investors’ faith" in government's ability to spend the money freed up by the changes.

"It will be important that the detail and practice deliver on the current ambition to ensure money is spent well," she said.

Gemma Tetlow's full analysis of the fiscal rules change can be read here.

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