The Labour party's election manifesto described its fiscal rules
as ‘non-negotiable'. These include a commitment to achieve
current budget balance – to cover all day-to-day spending with
tax revenues, borrowing only to invest – and a commitment to have
debt falling as a share of the economy in five years' time.
The precise technical details of these rules – such as which
measure of debt will be targeted – are yet to be spelled
out. While somewhat arcane, these details could make
a considerable difference to the degree of so-called ‘fiscal
headroom' against those rules this autumn. For
instance, switching to the ‘headline' measure of public sector
net debt (PSND) rather than the measure of ‘underlying' debt
(PSND ex BoE) used by the previous government would have added
£16 billion to measured ‘headroom' in March 2024.
Moving the fiscal goalposts in this way – as reports suggest that
the Chancellor is considering – might allow for billions of
additional borrowing while continuing to meet the letter of the
rules. Given the many demands for additional public spending, and
her promises not to raise income tax, National Insurance or VAT,
this could be the path of least resistance for the new
Chancellor.
It is certainly true that there is nothing particularly special
or desirable about the design of the existing debt target. There
are justifiable concerns about the potential impact of the Bank
of England's decisions about the pace of balance sheet reduction
(quantitative tightening) on the margin by which the rule is met.
But the principled case for a switch to targeting headline PSND
is weak. Other changes to the debt measure (e.g. stripping out
valuation losses on gilts held by the Bank of England) could be
attempted. But whatever the measure, any rule that precisely
targets the change in debt between the fourth and fifth years of
the forecast is unlikely to promote good fiscal policymaking. And
technical changes to definitions do not change the fiscal
reality: whatever the measure of debt, additional borrowing is
additional borrowing.
Ultimately, if the government wants to borrow more and
spend more, especially on public investment, then it would
ideally make the case for doing so on its own terms, rather than
hide behind fiscal jiggery-pokery.
Ben Zaranko, Senior Research Economist at IFS and an
author of the comment, said:
‘Tweaking the definition of debt, to allow for additional
borrowing without breaching the letter of the fiscal rules, may
well be an attractive option for the new Chancellor. Such a
change would be fairly modest and might be sufficiently far into
the fiscal weeds to avoid any sort of adverse reaction from
financial markets. But additional borrowing is still additional
borrowing. If the government wants to borrow and invest more,
there is a coherent and principled case to be made for doing so.
Ideally, we would hear that case and debate its merits, rather
than get bogged down in technical debt definitions and an
unhelpful discussion about so-called fiscal headroom.'
ENDS
Notes to Editor
‘Definitions of debt and the new government's fiscal
rules' is a comment by Isabel Stockton and Ben
Zaranko. It is embargoed to 0001 Wednesday 7th
August.
The full comment can be read under embargo
here. It will be hosted on the IFS website here.
This comment is the first output from this year's IFS Green Budget, which aims
to provide in-depth analysis of the economic challenges and
trade-offs facing the Chancellor ahead of the Budget each year.
The full report will be published in October.
To speak to a researcher, please contact the IFS press
office press@ifs.org.uk |
07730 667013.
The authors gratefully acknowledge funding from the Nuffield
Foundation through their support of the IFS Green Budget (WEL
/FR-000023255) and from the ESRC through the Centre for the
Microeconomic Analysis of Public Policy (ES/T014334/1).
The Nuffield Foundation is an independent charitable trust with a
mission to advance social well-being. It funds research that
informs social policy, primarily in Education, Welfare and
Justice. It also funds student programmes that provide
opportunities for young people to develop skills in quantitative
and scientific methods. The Nuffield Foundation is the founder
and co-funder of the Nuffield Council on Bioethics, the Ada
Lovelace Institute and the Nuffield Family Justice Observatory.
Visit www.nuffieldfoundation.org
