MNI EXCLUSIVE: UK Fiscal Rules May Emphasise Affordability

--Net Wealth And Debt-Interest-To-Revenue Measures Attractive As Debt-GDP Soars

By David Robinson

     LONDON (MNI) - Preparations are underway for a possible move to UK fiscal

rules focused on balance sheet strength and affordability rather than debt

levels, a change which could help governments justify higher spending.

     The Office for National Statistics says it is working on timely assessments

of the public sector balance sheet, vital for assessing compliance with any such

rule, while the incoming Treasury-appointed head of the Office for Budget

Responsibility, Richard Hughes, is a champion of fiscal targets based on

interest payments and net wealth.

     With debt-to-GDP levels rising above 100% following the coronavirus shock,

swinging the spotlight to less alarming measures would have obvious appeal for

Chancellor of the Exchequer Rishi Sunak. If the Treasury takes stakes in

struggling businesses, through its Project Birch scheme, the assets as well as

the debts would show up in balance sheet measures. Interest costs have also been

falling, providing another potential metric for rejigged fiscal rules.

     --EARLIER DEBT-TO-GDP MEASURE

     The Conservative government said before December's elections that revenues

should cover day-to-day spending, a slightly more flexible formulation than the

previous aim to match all spending. It also suggested capping interest costs at

6% of revenues. Earlier versions of UK fiscal rules, established before the

collapse of Lehman Brothers, included a target to keep public sector debt to no

more than about 40% of GDP. Now the rules are up for review again.

     Hughes, former Director of Fiscal Policy at the Treasury, produced a string

of work at the Resolution Foundation thinktank setting out the case for moving

beyond targeting debt levels. A co-author of some of that work, James Smith,

Research Director at the Resolution Foundation, told MNI that a previous

obstacle to public sector balance sheet targets, the lack of up-to-date numbers,

was no longer a problem.

     The ONS currently publishes several public sector balance sheet metrics

including Public Sector Net Financial Liabilities, which nets off financial

assets and liabilities including corporate equity stakes. It also has a measure

of Public Sector Net Worth in its Government Finance Statistics Manual.

     "The data are there and they are of sufficient quality to be used as

targets and part of the fiscal framework," said Smith.

     The ONS, in response to an MNI enquiry, highlighted its progress on public

sector balance sheet measures, but also made clear that future work would depend

on Treasury requirements.

     "We are actively working on strengthening the data required for estimating

public sector net worth (PSNW) on the European System of Accounts (ESA) basis.

There is no single way of estimating PSNW. We will therefore need to consider

the outcome of the review of the fiscal framework announced by the Chancellor in

the Budget 2020 in defining the exact scope and valuation basis of the new

measure and the timetable for its publication." the ONS stated.

     --GAMING RULES

     Charles Bean, former BOE Deputy Governor and currently a top OBR official,

has warned public sector net wealth measures may encourage the Treasury to use

cheap shorter-term borrowing to acquire assets that prove to be hard to value

and illiquid in times of crisis, though he noted also that all fiscal rules have

gaps, and that it is the job of the OBR and others to highlight risks.

     "There is always a temptation for policymakers to take advantage of very

low, near-term interest rates and shorten maturity," said Smith, who added that

moving to a rule targeting a maximum level of debt-interest-to-revenue might

make sense.

     "That case is sharpened by the current low level of global interest rates,

which obviously changes how you view more traditional stock and flow targets

within the fiscal framework," he said.

     Despite surging debt levels, interest payments are lower than a year ago

because of record low rates. The denominator of a potential interest

rate-to-revenues measure, though, has been hit hard by sliding tax takes.

     A plunge in revenues due to Covid-19 could result in a temporary overshoot

of a debt interest rule. One possibility, floated by Sunak's predecessor Sajid

Javid this week, would be to temporarily suspend the rule or for the OBR to

simply deem any miss as likely to be one-off.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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