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ShareWhat IFS says about changing definition of debt used in government’s fiscal rules to PSNFL
This is what the Institute for Fiscal Studies said in a briefing published last month about changing the defintion of debt used in the government’s debt rule from underlying PSND to PSNFL. (See 9.01am.) The IFS is quite sceptical, and warns that more borrowing could push up interest rates (which is also what the Conservative party says).
It is hard to avoid the suspicion that the government is attracted not by any theoretical advantages of a change in the debt rule, but by the fact that it would allow for significantly more borrowing for investment. Here, it is worth pausing to comment on scale. On existing plans, public sector net investment is currently forecast to be £53 billion in 2028–29. Net gilt issuance in 2028–29 is forecast to be £87 billion. Against that, any change that allowed for an extra £50 billion of borrowing for investment would be an enormous shift, even if not all of this extra space were used at once. If even half that figure were spent on additional investment, debt (on the previous target’s measure) could be more than 3% of national income higher by the end of the parliament and would almost certainly still be rising at the end of the forecast period, even accounting for typical feedback effects via a larger economy.
Such a large change would also raise questions about the government’s capacity to spend this money well, and about the possible impact on government borrowing costs and interest rates more generally. Previous Treasury modelling suggested that an increase in borrowing of 1% of GDP might increase interest rates by between 50 and 125 basis points, depending on economic conditions. An extra £50 billion of borrowing in 2028–29 (roughly the amount of extra ‘headroom’ provided by a switch to PSNFL) would amount to around 1.6% of GDP. To the extent that the additional investment produced material benefits for the productive potential of the economy, we would expect the impact on interest rates to be smaller. But the point is, additional borrowing on this scale could have a material impact on interest rates.
The IFS also argues that changing the definition could be seen as a breach of Labour’s manifesto promise to stick to its “strong fiscal rules”. But the manifesto did not commit the party to a specific debt definition, and the IFS acknowledges that what measure of debt is used for these purposes is probably “not a mainstream political issue”.
ShareStarmer defends plan to change definition of debt used in fiscal rules, rejecting claim this might spook investors
Good morning. Officially Rachel Reeves, the chancellor, will unveil Labour’s first budget (and probably the most important of the whole parliament) on Wednesday next week. But in practice budget announcements are now two-week news events, because the Treasury knows that it is bad idea to spook the markets with lots of surprises on the day and so this government, like past governments, has been engaged in elaborate pitch-rolling, ensuring that there are plenty of reports in advance giving a broad idea of what is coming. Not all the stories you might read this week about what will be in the budget will be accurate, or Treasury-sanctioned, but quite a lot of them are.
One of the measures subject to a lot of pitch-rolling is the proposal to change the official definition of debt used in the government’s fiscal rules. Reeves has been hinting for a while that she will change this and today, at a meeting of the IMF in Washington, she will confirm this.
The government is committed to having debt falling as a share of national income in the fifth year of the economic forecast (ie, in five years’ time). The last government used to define debt as headline public sector net debt (PSND) but when Rishi Sunak was chancellor he changed this to underlying PSND – which is PSND excluding the Bank of England’s liabilities. This is the definition currently in use.
The Institute for Fiscal Studies recently published a good paper explaining what alternative definitions Reeves could choose, and today Larry Elliott, Pippa Crerar and Richard Partington say she will opt for public sector net financial liabilities (PSNFL). They says in their story:
This yardstick – which will replace public sector net debt – will take into account all the government’s financial assets and liabilities, including student loans and equity stakes in private companies, as well as funded pension schemes.
This would give the chancellor room to increase borrowing for investment in long-term infrastructure …
Had [Conservative chancellor Jeremy] Hunt adopted a PSNFL target in March, it would have added about £53bn to his borrowing headroom.
Keir Starmer is at the Commonwealth heads of government meeting (Chogm) in Samoa and, as Eleni Courea reports, he was asked if he was worried that changing the definition of debt would scare investors. Starmer replied:
The chancellor has made clear, both in her conference speech and consequently, about her desire to see more investment in the economy.
It’s a matter of record that investors in the UK have previously said that UK investment levels are too low both in terms of public infrastructure and in terms of business investment more generally.
Starmer said the budget as a whole would be “unashamedly pro-business”. He said:
Investors shouldn’t be worried about this budget. This government is prioritising growth. It’s unashamedly pro-business.
You’ll have seen from the significant vote of confidence in the UK economy at the international investment summit that it is already the case that investors are responding positively to the government’s plans.
He also said his government’s first budget would be a “significant” one that would “give a sense of how we intend to do business”.
Here is the agenda for the day.
9.30am: Pat McFadden, the Cabinet Office minister, takes questions in the Commons.
11.30am: Downing Street holds a lobby briefing.
Noon: Angela Rayner, the deputy PM and housing secretary, gives a speech to the Local Government Association.
Afternoon (UK time): Rachel Reeves, the chancellor, is in New York for the annual IMF meeting, and is due to give broadcast interviews.
Also, the football governance bill is being introduced today in the House of Lords.
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Keir Starmer arrives in Apia, Samoa, where he is attending the Commonwealth summit. Photograph: Stefan Rousseau/PAShare
Updated at 09.31 BST