Mervyn King has warned Rachel Reeves against altering how the government defines its debt in the upcoming Budget, and called for the fiscal rules to be assessed by parliamentary term.
Speaking in an interview on BBC Radio Four’s Broadcasting House, the former governor of the Bank of England said that the way the government polices borrowing invariably leads to “half measures” that don’t result in “dramatic change”.
Asked whether he felt Reeves was likely tweak the fiscal rules to free up money to spend on capital investment, Lord King said: “I think there’s bound to be some change… I think the mistake would be to change the definitions of debt and deficits.”
The former central banker’s warnings come after it Reeves, who will deliver her first Budget in just over a month’s time, was reported to be looking for ways to free up cash to invest in the economy by allowing the government to offset its assets – like student debt – against its own borrowing.
Treasury officials believe the move could free up £50bn to spend on roads, housing and other major infrastructure.
Mervyn King, who played an integral role in orchestrating the UK’s response to the global financial crisis of 2008, also used the rare intervention to propose a new model for the government to police its own borrowing.
“The ratio of national debt to national income is the right metric by which to judge whether we’re on a sustainable path,” he said. “But to judge it by reference to a forecast five years ahead – a rolling five-year horizon – doesn’t make any sense.
“The right thing to do would be to commit having the ratio of debt to national income falling by the end of this parliament – a fixed date.”
The current fiscal spending rules, which state that the debt-to-GDP ratio should fall within a rolling five-year horizon, have been criticised by several leading think tanks in recent years, including the Institute for Government.
Concerns tend to revolve around the fact they discourage large capital spending projects and allow governments to put off difficult decisions into the future.
The Treasury was contacted for comment.