An influential left-leaning think tank has called on the government to make fundamental reforms to the fiscal rules in order to promote growth.
In a new report published today, the Institute for Public Policy Research (IPPR) argued that the fiscal rules should target ‘public sector net worth‘ (PSNW) rather than net debt.
PSNW is a broader measure than the existing debt target, including both financial assets held by the government – such as student loans – and physical infrastructure, like roads, schools and hospitals.
The think tank suggested that the fiscal rules should commit the government to increasing PSNW increasing in year five, whereas the rules currently require debt to be falling in five years time.
Adopting this target would generate up to £57bn additional headroom for the Chancellor, the IPPR estimated, although it cautioned that some of this should be held back as a buffer against uncertainty.
Lord Jim O’Neil, an ex-Treasury minister and former chair of Goldman Sachs Asset Management, said the changes would align the fiscal rules more closely with “how financial markets think about fiscal sustainability”.
“Bond investors understand that borrowing to invest – if part of a clear plan – increases future growth and improves the government’s financial position,” he said in a foreword to the report.
“Incurring slightly higher debt to fund high quality investment will thus not permanently push up borrowing costs.”
The current set of fiscal rules, the UK’s ninth, has come under fire from a range of different quarters for their perceived impact in disincentivising government investment.
The rules require debt to be on a downward trajectory in five years time, which effectively encourages governments to cut capital spending because the benefits are only felt beyond the five-year forecast horizon.
Chancellor Rachel Reeves has suggested she will reform the fiscal rules to “take account of the benefits of investment, not just the costs,” but the details will only be confirmed in the budget.
Many commentators expect her to stick to the rule which requires net debt to be falling in five years time, but to tweak the measure of debt.
Previous IPPR research suggests public investment as a share of GDP has lagged the G7 average every year since the early 1990s, which has contributed to sluggish private sector investment.
“The UK is stuck in a low growth trap, mainly caused by three decades of ultra-low investment,” Carsten Jung, senior economist at the IPPR said.
Jung argued that the government should also embark on longer-term changes to the UK’s fiscal framework, including putting more emphasis on debt servicing costs and developing metrics that capture the future impact of policy choices.