Press Story

Current rules fail to promote fiscal sustainability, IPPR says, choking off valuable investment while also omitting key financial indicators

With public investment low and set to fall further in coming years, Treasury should adopt ‘public sector net worth’ target at Budget

New target would increase headroom for investment by £57 billion, though some should be held as a buffer, the report finds

Wider rethink should follow, to create more sophisticated tests for strength of UK’s economic plans

The chancellor should use the Budget to begin reforming UK fiscal rules, with the aim of making the UK’s fiscal framework one of the most growth-friendly and rigorous in the world, a new IPPR report urges today.

The call is endorsed by Lord Jim O’Neill, former Treasury minister who was previously chair of Goldman Sachs Asset Management and has written a foreword for the report.

It calls on the government to choose a new ‘public sector net worth’ (PSNW) target for the existing rule that determines how much it can borrow to invest in the UK’s economic infrastructure.

Instead of using the previous government’s rule that says net public debt should be falling in year five of the economic forecast, the government should commit to public sector net worth increasing in year five.

PSNW is one of the most comprehensive debt targets, covering all public sector assets and liabilities. It would make more economic sense, the IPPR report says, than the previous government’s rule, which does not account for the full set of publicly-held assets (such as equity stakes) and liabilities (such as pension liabilities).

Net worth is thus a “more honest” measure when assessing the government’s financial position, including its ability to borrow to invest. IPPR says using this measure is akin to investors in a company looking not merely at a company’s indebtedness, but also at its assets and growth strategy.

The current rule does not even work on its own terms of promoting fiscal sustainability, IPPR’s report says. It omits key financial indicators, such as the cost of debt servicing. But it also ignores the fact that public investment can generate significant future returns and can thus be paid for by borrowing. A framework that delivers fiscal sustainability should account for this.

The UK has the lowest public investment rate among the G7 group of leading economies, severely hampering the government’s growth ambition, and on current plans this is set to fall almost 30 per cent further over the next five years.

There is widespread agreement that higher investment is needed in assets such as railways, digital infrastructure, public buildings and equipment to raise the growth rate. Strategic public investment would act as a catalyst to ‘crowd in’ investment from the private sector.

Adopting the new ‘public net worth’ target for the government’s fiscal rule could generate up to £57 additional ‘headroom’ to borrow to invest, the report finds, although it advises that some of this should be held back as a buffer against uncertain economic forecasting.

IPPR also says that - after making that immediate change in the Budget - the government should embark on longer-term changes to make the UK fiscal framework “one of the most growth friendly, but also one of the most rigorous, in the world”. These include:

Rethinking the timeframe of the debt rule to end its sole focus on the difference between years four and five of the economic forecast. This is “unnecessarily narrow”, the report says.

Putting greater emphasis on debt servicing costs which have little weight under the present system, despite the impact of higher interest rates on the government’s day-to-day spending. Such an indicator is easy for the public to understand and can also reflect the state of the economy.

Developing metrics that better reflect the future impact of today’s fiscal policy choices (such as infrastructure investment versus tax cuts). Mainstream institutions such as the International Monetary Fund routinely conduct this type of analysis when assessing countries’ public finances.

Reflecting the benefits of making the economy more resilient against future shocks (such as an energy crisis). This is because reducing future risks to the economy will at the same time improve fiscal sustainability.

The report includes a foreword by Lord Jim O’Neill, chair of the Northern Powerhouse Partnership, who managed more than $800 billion of assets while at Goldman Sachs and also served as commercial secretary to the Treasury under David Cameron and Theresa May.

In his foreword Lord O’Neill says:

“This report highlights how Labour can implement its fiscal rules in a way that embeds a more long-termist approach. Focusing on a more comprehensive debt metric – such as public sector net worth – would provide greater room for borrowing to invest in line with more credible transparent rules on deficits and debt. It would also bring fiscal rules more in line with how financial markets think about fiscal sustainability...

“I applaud IPPR's recommendations – they take us towards a more comprehensive framework that encourages productive investment and long-term thinking. The UK direly needs it.”

Carsten Jung, IPPR head of macro, the author of the report, said:

“The UK is stuck in a low growth trap, mainly caused by three decades of ultra-low investment. The new Labour government has been elected on a platform to change this, but has inherited fiscal rules that neither promote growth nor succeed on their own terms in delivering fiscal sustainability.

“In the short term, the Budget should target public sector net worth instead of net debt. This would provide significant additional space to borrow to invest and get the UK building again. But the job won’t be done with this alone. In the long term we need a more wide-ranging framework that covers the cost of our debt but also reflects future economy-wide impacts of today’s fiscal choices.

"The UK has a proud history of pioneering fiscal institutions with high credibility that are copied elsewhere in the world, such as the Office for Budget Responsibility. Starting a clear-headed reform process now could make the UK fiscal framework one of the most growth friendly, but also one of the most rigorous, in the world.”

ENDS

Carsten Jung, IPPR head of macroeconomics, author of the report, is available for interview

Lord Jim O’Neill is also available for interview

CONTACT

David Wastell, Director of News and Communications: 07921 403651 d.wastell@ippr.org

Liam Evans, Senior Digital and Media Officer: 07419 365334 l.evans@ippr.org

NOTES TO EDITORS

The IPPR paper, Budgeting better: How the UK could start to improve its fiscal framework and improve growth by Carsten Jung will be published at 0001 on Tuesday October 8. It will be available for download from that date at: https://www.ippr.org/articles/budgeting-better
Advance copies of the report are available under embargo on request.
Public sector net worth (PSNW) provides a more comprehensive view of a government's financial position compared to public sector net debt (PSND) by including a broader range of assets and liabilities. PSNW encompasses financial assets such as student loans, or equities held by public sector pension funds. It also includes the value of non-financial assets such as hospitals, schools, roads, and other infrastructure. On the liabilities side, PSNW accounts for all debt obligations covered in PSND. But it also covers both funded and unfunded public sector pension obligations, which are typically excluded from PSND calculations. Additionally, PSNW considers contingent liabilities such as guarantees and financial derivatives, providing a more holistic picture of the government's financial commitments. This expanded scope allows PSNW to offer a more comprehensive understanding of a nation's fiscal health, reflecting both its tangible assets and long-term obligations in a way that PSND does not capture.
IPPR (the Institute for Public Policy Research) is an independent charity working towards a fairer, greener, and more prosperous society. We are researchers, communicators, and policy experts creating tangible progressive change, and turning bold ideas into common sense realities. Working across the UK, IPPR, IPPR North, and IPPR Scotland are deeply connected to the people of our nations and regions, and the issues our communities face. We have helped shape national conversations and progressive policy change for more than 30 years. From making the early case for the minimum wage and tackling regional inequality, to proposing a windfall tax on energy companies, IPPR’s research and policy work has put forward practical solutions for the crises facing society. www.ippr.org