Rachel Reeves is considering changes to the government's so-called fiscal rules governing how much money can be spent in next month's budget.
The changes are aimed at paving the way for billions of pounds of additional investment into the UK economy, helping to decarbonise the economy and restart growth.
“It's time for the Treasury to move from just calculating the cost of investment to recognizing the benefits,” Reeves said in a speech at the Labor Party conference on Monday, suggesting a change in direction.
But with government debt reaching 100% of GDP and total debt reaching £2.5tn, there are questions about how far Mr Reeves can go.
Will this break the manifesto commitments?
Before the election, Reeves pledged to abide by two fiscal rules that are largely similar to the self-regulation set out by his predecessor, Jeremy Hunt.
The manifesto's first pledge was to balance day-to-day spending with tax revenue.
Speaking at an event accompanying the party's annual conference, Mr Reeves said the bill would be “incredibly difficult” to implement and would still require the government to make “tough decisions” on tax and spending.
“The £22bn black hole in public finances makes it even more difficult,” she says. “If we had carried that £22 billion forward into each parliamentary year, the previous government would not have met the fiscal rules and we would not have met the fiscal rules, so we have to take action in the October budget. “”
The second rule was that debt as a share of the economy must have declined by the fifth year of projections produced by the Office for Budget Responsibility. This is where Reaves is most likely to make changes.
This could break the manifesto promise, but the Treasury view is different. Mr. Reeves could argue that he is changing the definition of debt while promising to eliminate this alternative.
Why is the Bank of England important?
One well-founded idea is that Treasury losses to the Bank of England Reduce the crisis-era quantitative easing bond purchasing program. Experts say this could free up between £10bn and £20bn.
Threadneedle Street amassed £895bn worth of bonds in the fight against the 2008 financial crisis and the coronavirus pandemic. But now they are being sold for less than the price paid, and the Treasury has taken up the matter. Total losses could reach £100bn over the next 10 years.
Mr Reeves received £10bn of support earlier this month after announcing the central bank would sell £100bn of bonds over the next 12 months, but it was less than the OBR expected and therefore the loss was smaller. However, excluding losses completely gives you more leeway.
Can the Chancellor argue that green investment should not increase debt?
Mr Reeves could exclude Labour's new public investment company from debt, allowing it to borrow money as long as the chancellor thinks there is market appetite for it.
Compared to some countries that already do this with their national energy companies, the UK is an outlier.
The union briefed the finance ministry on the matter, highlighting how Germany has excluded energy company Stadtwerke München, the people said. Mr. Orsted's debts are not included in Denmark's national statistics, Mr. Vattenfall's debts are not counted in Sweden, and neither Statkraft nor Equinor are included in Norway. German state-owned development bank KfW is also excluded.
this is, Definition of the Maastricht Treaty Total debt does not include public institutions engaged in “enterprise activities” or “market production”. The definition includes the debt of savings banks, public utilities, and waste management operators.
Supporters of Ed Miliband insist that the energy secretary remove the new agency from the government's balance sheet, but that he does not take part in the pre-Budget decision-making process.
Can Mr. Reeves change his debt goals?
Currently, fiscal rules cover public sector net debt (PSND), which measures past borrowing, totaling £2.5 trillion. But the measure does nothing to value the state's vast assets, from roads to public parks.
Reeves may decide to target alternatives already tracked by the OBR. Public sector net financial debt (PSNFL), taking into account all financial assets and liabilities, the total comes to around £2.4 trillion.
Net public sector debt was expected to rise in the March Budget, but it will fall slightly from 93.2% of GDP to 92.2% in the fifth year, leaving Hunt's finances with an £8.9bn cash cushion. fulfilled the rules.
Alternatively, debt is projected to fall each year, including a significant fall from 80.6% of GDP to 78.7% in year five, equivalent to more than £50bn in cash terms.
The main reason for the difference is how public assets from which governments expect future fiscal returns (such as student loans and corporate equity) offset liabilities such as government debt and public sector pensions. .
“Current debt targets set incentives to sell illiquid assets like the student loan book. It depends on whether the asset gets a good price or whether the public or private sector is better able to manage it. In the long run, whether you think it is or not, it is,” said Isabel Stockton, an economist at the Institute for Fiscal Studies think tank. However, there may be challenges. “If that were to become the main fiscal rule, we would be concerned about the incentives to use the system to organize a larger proportion of public spending as loans.”
Can the Prime Minister go further?
One of the most gratifying measures Reeves could target is public sector net worth (PSNW) includes financial assets as well as non-financial assets such as road networks, schools, and hospitals.
By using these assets to offset government debt, the measure currently Deficit of around £700bn – This is significantly lower than the UK’s total net debt of £2.5tn.
With this broader perspective, you may be able to demonstrate the value of investing in everything from buildings and roads to machinery, intellectual property and art. Economists are international monetary fund The country praised the index in July, saying it was “more conducive to public investment and economic growth” and could still serve as an anchor “to arrest unsustainable debt trends.” did.
However, this measure may be difficult to adopt because non-financial assets are difficult to value. Roads like the M4 motorway and buildings like 10 Downing Street may not be desirable to sell or get rid of quickly.
Expanding what the government counts with this measure could also result in useless liabilities, such as PFI contracts that are intentionally kept off the government's books and unfunded pension plans.
For these reasons, economists say PSNW should not be the main target for government adoption, but could serve as part of broader measures as it could help encourage investment. is often claimed.
Is there a risk of a truss-shaped market reaction?
Part of the reason Mr Reeves has stuck so closely to his self-imposed fiscal rules is for political reasons: to show voters that Labor can be trusted financially. But it is also to show financial markets that the new government is committed to avoiding a repeat of Liz Truss' government's mini-budgets.
The Treasury Department previously warned that increased borrowing could raise inflation and interest rates, according to an official who recently left the department.
The official added: “Officials will be much more comfortable with the Bank of England's changes than with an indefinite window for the government to borrow as much as it wants to fund capital investment.” Once you've carved out GB Energy, why not make it even bigger and take on debt? ”
Former Prime Minister Jeremy Hunt tweeted on Thursday. “My advice from HMT officials has always been very clear on this point: the more we borrow, the longer interest rates will stay high.”
However, current fiscal rules are increasingly discredited among leading economists. IFS's Mr. Stockton said frequent changes to rules could be alarming to markets, but suggested some adjustments would be welcome.
“Certainly, keeping KfW outside of Germany's debt rules does not seem to affect the cost at which Germany can borrow. Investors seem to welcome that,” she said.
Andrew Goodwin, chief UK economist at consultancy Oxford Economics, said Mr Truss had weakened the Treasury and the Bank of England with massive tax cuts that did little to improve the long-term prospects of the UK economy. He said that he surprised the market by announcing this.
“It depends on the scale and type of mitigation Reeves employs after the rule change, but I think the risk of a truss event is very low,” he said.
“If Mr. Reeves were to use his spare capacity to increase investment, the market would think that would be a wise move.”
