MNI INSIGHT: Accounting Changes Nudge Up UK Borrowing Needs

--Postponed UK Nov. 6 Budget Leaves Fiscal Rules In Limbo

--Office for Budget Responsibility Nov, 7 Estimates To Point To Higher Financing

Requirement

By David Robinson

     LONDON (MNI) - Accounting changes will slightly push up a key measure of UK

government borrowing needs, according to restated fiscal forecasts to be

published by the UK's Office for Budget Responsibility on Nov. 7, MNI

understands.

     The correction of some double accounting of corporation tax receipts will

feed through into a marginally higher Central Government Net Cash Requirement,

the report will show.

     No fresh government revenue raising or spending plans, or economic data

since the previous OBR forecasts in March, will be included in the restated

forecasts, following finance minister Sajid Javid's announcement Oct. 24 that he

was postponing the budget previously set for Nov. 6, against a backdrop of

Brexit delays and a looming election.

     Changes to official accounting also affect student loans and government

pensions, but only corporation tax is set to have significant impact on the

CGNCR, MNI understands.

     --GILT ISSUANCE

     The Office for National said in September the tax change would reduce

2018-19 fiscal receipts by stg2.6 billion. The Debt Management Office is likely

to publish revised plans for issuance of UK Treasury bonds, or gilts, at the

time of the next budget, which will now not be made public until after the

election set for Dec. 12.

     The budget should be accompanied by a new set of government fiscal targets,

after Javid said Sept. 4 he would review old rules. Under his predecessor Philip

Hammond, 2020/21 borrowing would have been constrained to below 2% of GDP, after

adjusting for the economic cycle, and debt should have fallen as a percentage of

GDP. The government also previously aimed, over the longer term, to eliminate

the deficit altogether.

     One option for Javid, if he is still in his job by the time the next budget

is revealed, probably early next year, would be to exempt investment spending

from targets, to make room for his ambition for more infrastructure spending.

     But Richard Hughes, former Director of Fiscal Policy at the Treasury, told

MNI it would be better to base rules on government accounts as a whole, via a

measure of public sector net wealth.

     "Governments are saying we want to go out there and borrow to invest and it

is going to be good for future generations, it is going to be good for

taxpayers, it is all going to pay for itself," Hughes, a Resolution Foundation

researcher, told MNI. "But how do you demonstrate if that proposition is

actually credible? How do you hold a government to account for a proposition of

that nature? You can't do it by excluding the assets and just showing the

borrowing and just showing the debt."

     --NET WORTH WEAK BY WORLD STANDARDS

     UK public sector net worth, which captures all government financial and

non-financial assets and liabilities, is relatively weak by international

standards, with stg2.3 trillion of assets outweighed by stg3.8 trillion of

liabilities. Hughes argues that a rule to increase the measure as a percentage

of GDP by 2024-25 would force the government to concentrate more on the value of

its investments.

     Such a measure would also better reflect the impact of unconventional

monetary policy, by showing how Bank of England asset purchases through

quantitative easing and provision of cheap funding to banks in return for

collateral show up on both sides of the balance sheet.

     The ONS now publishes quarterly data on the overall balance sheet and the

OBR has begun to forecast the government's financial balance sheet, providing a

better picture of the impact of BOE policy on future fiscal accounts.

     "If you compare that to where we were ten years ago, the whole of

government accounts was coming out 18 months after the end of the financial year

and it was just not timely enough to tell you what to do with the public

finances in the budget," Hughes said.

     There are, however, potential pitfalls to such an approach. Charles Bean,

head of OBR forecasting and a former BOE deputy governor, said at a Resolution

Foundation event that while he favoured comprehensive balance sheets there was a

risk of incentivising short-term borrowing to invest in assets which could prove

hard to sell.

     "As somebody who sat through the financial crisis and the eurozone debt

crisis that fills me with horror," he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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