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Four years ago, I was seduced by the idea that the UK should adopt a new fiscal rule based on assets as well as debt. Running the public finances with the ambition of improving public sector net worth made me think the nation could borrow more, produce valuable tangible assets and improve the shabbiness of the public realm. No longer would Britain be held back by an arbitrary debt rule, I argued.
In making this case, I was an early adopter. Soon afterwards, Richard Hughes, who now chairs the Office for Budget Responsibility, published a Resolution Foundation pamphlet along similar lines. This year the Labour party has flirted with such a fiscal rule, “taking into account public sector assets as well as public sector debt”.
But four years on, I have realised that I was wrong. I’m sorry. A balance sheet rule is just the outcome of a search for an easy answer to a complicated problem, with salvation seemingly coming in the form of more borrowing and spending.
Think for a few seconds about HS2. What asset value should we write into the public balance sheet for a high-speed railway line that now appears likely to operate as a shuttle between a London suburb to Birmingham?
If you think mentioning HS2 is a cheap shot, please also consider the measure of public sector net worth itself. The Office for National Statistics estimates it was £618bn in the red at the end of August this year. UK public liabilities exceeded the value of assets. The deficit also worsened from £487bn a year earlier, so any net worth fiscal rule would currently be screaming “raise taxes, cut spending”. Be careful what you wish for.
More fundamentally, an asset on a public sector balance sheet only has value if it can be sold. If we think about schools, hospitals, prisons or the road network, ministers would only find willing buyers if they were allowed to charge for their use. That would involve the public having to pay fees for services that were previously free — something that would feel little different from a new tax. Public sector non-financial assets are therefore not special. They are the same as the key asset any government controls — the ability to tax citizens in the future.
A new fiscal rule that values assets as well as liabilities also fails to deal with the real problems besetting UK public infrastructure and capital projects. These include feast and famine cycles of public investment, poor value for money and politicians who prioritise shiny new projects over essential maintenance. All it does is give you an excuse to borrow and invest more, so long as you don’t look at the actual statistics.
While the figures on the assets side of the public sector balance sheet are largely made up, the liabilities are all too real and need to be managed. Public sector net debt — some £2.6tn of it, almost 100 per cent of national income — needs to be serviced, rolled over when it matures and to be manageable in the longer term.
This requires a proper debt sustainability calculation taking future interest rates, growth rates and borrowing into account. These are highly uncertain and sensitive to the assumptions made and that is why we have the sort of fiscal rules we do. Ensuring we do not borrow for current spending and targeting a gradually declining share of public debt provide rough and ready rules that would pass most rigorous debt sustainability assessments.
None of this means that we cannot afford to invest more to improve the fabric of the UK state. But more spending inevitably puts the UK’s public finances on a less sustainable path than they are at present. So, here is a new fiscal rule of thumb. Until the public finances are sustainably healthier, suggestions for new capital projects should go ahead only if politicians are willing to back them with new taxes.