Rachel Reeves’ plan to change the fiscal rules to redefine debt reveal a Chancellor dangerously out of her depth, says Andrew Griffith
A flurry of briefings suggest that the Chancellor is rolling the pitch to change the fiscal rules or the definitions of debt within them. These are the same thing: the ‘golden rule’ of debt falling over the medium term isn’t much of a rule if you decide yourself what counts as debt, or you magic up some ‘assets’ to offset what you owe.
As individuals, we don’t get to decide which bills or credit cards to conveniently forget at the end of the month. For the Chancellor to do so would live up to her reputation of ‘Reckless Reeves’.
As one of the longer serving FTSE100 finance directors before standing for parliament, I was trained to always take a prudent view; accounting for every liability but being cautious about what really was an asset and whether it could be turned into real cash if required.
That experience is why I am concerned to hear ideas like student loans (of which most are never likely to be repaid) or the money given to Ed Miliband’s GB Energy being treated as ‘assets’.
Would anyone trust the government to define themselves what an ‘asset’ is? And once they start, where would it stop. Labour politicians are fond of talking about ‘investment’ in public services but almost all of this is the day-to-day cost of staff. Valuable to society certainly but not in the sense of being an ‘asset’ that can be used to offset a debt.
Nor should Treasury officials or the OBR permit the Chancellor to take a ‘pick and mix’ approach. There are many liabilities which are not recorded on the government’s balance sheet – the largest of which are the unfunded public sector pensions estimated at a staggering £1.3 trillion.
This whole debate reveals a Chancellor who is out of her depth having realised her tax sums don’t add up just as she’s reached the checkout with a trolley full of spending ideas.
Playing chicken with the bond market
This matters to everyone as governments playing chicken with the bond market never ends well. Bill Clinton’s chief strategist James Carville said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope. But now I would want to come back as the bond market. You can intimidate everybody.” He is right. The gilt market is intimidating. As economic secretary in the last government I was responsible for the Debt Management Office whose job is to be able to sell gilts to investors at a sufficient pace to keep the furnace of public sector spending alight.
From £170bn of gilts then, the latest expectation is that £280bn will be needed this year. That’s more than one billion pounds every working day. And its £280bn opportunities for the bond market to blow a raspberry and say ‘no thanks, we’ve lost trust in you’.
Even rumours of Rachel Reeves being willing to play fast and loose with the UK’s reputation for probity has contributed to gilt yields increasing from 3.75pc to 4.2pc – nearly two whole percentage points than the German equivalent.
From Tulipmania in the 17th century to the collateralised mortgage scandal behind the 2008 crisis, every finance disaster has as its heart misvaluing so-called ‘assets’ on the balance sheet.
From Tulipmania in the 17th century to the collateralised mortgage scandal behind the 2008 crisis, every finance disaster has as its heart misvaluing so-called ‘assets’ on the balance sheet
In their excellent book on financial crises, ‘This Time is Different: Eight Centuries of Financial Folly’ the authors remind us how each time policy makers and central bankers convinced themselves that the old rules of valuation no longer apply. Someone should give Reeves a copy fast.
Andrew Griffith is MP for Arundel & South Downs and a former economic secretary to the Treasury