UK minister Grant Shapps on Sunday told Sky News: “Money is not infinite”. That’s classic British understatement. In fact, self-imposed public spending constraints leave the government with little to no money for tax cuts or investments like the North-South rail link HS2. If it wins the next election likely to take place in 2024, Labour will have to change rules to find the cash for much-needed expenditure.
Having fiscal rules – and sticking to them – is crucial for governments. That particularly applies to the UK, given Conservative Prime Minister Liz Truss caused a bond market meltdown a year ago by proposing unfunded tax cuts. Yet the current fiscal constraints, which focus largely on debt, don’t reflect Britain’s full financial position and prevent the administration from investing in future growth. A broader measure of the UK balance sheet, coupled with borrowing limits, would help the next premier fix the country.
PM Rishi Sunak is currently expected to manage the economy so that public sector net debt falls as a share of GDP over a five-year period. This arbitrary measure leaves finance minister Jeremy Hunt with just 2.8 billion pounds to spend on tax cuts or investments between now and the year ending in March 2028, according to the Office for Budget Responsibility, the independent fiscal watchdog. That’s why Hunt has sounded sceptical about fiscal giveaways in the November budget and Sunak is looking at delaying parts of HS2 and reducing state pensions costs.
Such fiscal austerity harms the country’s economic prospects. Both public and private investment fall short of what’s needed. Without a rethink, Britain won’t boost productivity and its growth will lag other major economies. The Bank of England expects anaemic GDP growth of 0.5% next year and 0.25% in 2025, and long-term growth of just 1%.
That could change if Labour, which leads Sunak’s Conservatives by 44% to 27% in the polls, wins a national election expected in late 2024. First, though, it would need new rules. Instead of obsessing about debt, an administration led by Labour leader Keir Starmer could look at a broader metric, “public sector net worth”.
PSNW measures the total value of the public sector’s assets minus its liabilities. By using corporate accounting methods, the yardstick forces politicians to take a more holistic view of what they own and owe.
In the UK, PSNW, excluding public sector banks, showed a deficit of 617.8 billion pounds in August, around 24% of GDP. On the assets’ side the biggest item is 1.6 trillion pounds in “non-financial assets”. That includes a huge amount of government-owned properties which, at present, are valued at historical cost, or what they were bought for.
In a forthcoming book, “Public Net Worth”, Ian Ball, Willem Buiter, John Crompton, Dag Detter and Jacob Soll argue that the status quo vastly undervalues public real estate holdings. Crompton told Breakingviews that more realistic accounting could drive up the value of these properties by up to 80%. Applying that metric would add 1.3 trillion pounds to UK net worth, tipping it into a surplus.
On the flip side, the UK had around 665 billion pounds in “other financial liabilities”, which include future payments to government retirees. The government borrows to fund those. A PSNW-led approach to public finances would encourage the use of assets to fund those liabilities. For example, the government could invest the funds it borrows in a portfolio of private and listed securities, much like a sovereign wealth fund, and use the returns from those assets to fund pension liabilities over the years.
Corporate-like accounting would admittedly not turn the controversial HS2 into a financial no-brainer. While it would include the value of the rail assets rather than just the debt issued to fund them, a potential doubling of costs from 56 billion pounds to a likely 100-plus billion pounds would still mean that the asset would be considered impaired. Yet even if it shrank UK net worth in an accounting sense, HS2’s scope to ease capacity on other British rail networks makes it a potential productivity-spurring public good.
In any case, adopting PSNW would give the UK more fiscal headroom to undertake further investments. Currently the metric is expected to grow by 2.6% of GDP by March 2028, according to the OBR – implying 65 billion pounds of extra borrowing power. In comparison, public sector net debt by the same date is expected to decline by just 0.7% of GDP, unlocking only 17.5 billion pounds. In New Zealand, which adopted the PSNW approach in 1989, public net worth has improved every year, aside from four years after the 2008 financial crisis, the 2011 earthquakes and the pandemic. Ball, who was one of the architects of that system, admits that it’s difficult to directly link the new accounting method to economic growth but is adamant that a strong balance sheet helped New Zealand respond effectively to huge shocks such as the earthquakes and the pandemic. — Reuters
The author is global economics editor for Breakingviews, based in London
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