MNI INTERVIEW: UK Has Little Fiscal Space Even If Rules Change

Any moves by a future UK government to tweak the current fiscal rules or to put more emphasis on public sector net worth will fail to disguise the lack of space for additional spending, Institute for Fiscal Studies senior research economist Ben Zaranko told MNI.

Both the current Conservative administration and the opposition Labour Party, which is far ahead in the opinion polls ahead of a 2024 election, have adopted fiscal goals to put debt on a declining path, but Labour has signalled it would place greater weight on PSNW and has left itself room to carve investment out of the target.

However elevated debt interest payments and debt-to-GDP in the high 90 percents means primary budget surpluses are essential, Zaranko said.

"We are on track to run the biggest primary surplus in a generation, the first one since 2001 ... and that is just to stabilize debt.Whether you tweak your fiscal rules, the fundamentals are such that there is limited fiscal space," Zaranko said.

HARD TO VALUE ASSETS

While Office for Budget Responsibility head Richard Hughes has argued for setting a target of increasing PSNW, Zaranko noted that assets such as road networks are hard to value, while other perverse effects from using the measure as a guide could be an apparent increase in fiscal space as land prices rise, even if the government has no plans to sell property. (See MNI EXCLUSIVE: UK Fiscal Rules May Emphasise Affordability)

Any Labour move to remove investment from borrowing goals would also be constrained by the debt target, which has no investment exemption.

"They say they would borrow only to invest but that is not what is binding in the current climate," Zaranko said.

While during the much of the past decade stronger growth and lower debt interest costs might have meant that a goal to balance current spending rather than to reduce debt would have been acceptable, giving Labour substantial room to invest, “that is not the world we are in at the moment and so it is the debt... (rule that) will be the problem," he said.

Borrowing this fiscal year is set to undershoot the official estimate from the OBR back in March, with a new forecast due in next month's Autumn Statement. The IFS/Citi's projection in the Green Budget was GBP112 billion net borrowing for the 2023/24 fiscal year, GBP20 billion below the OBR's but the outlook in future years remains very challenging with markets now pricing in higher-for-longer interest rate expectations which alone would add GBP20 billion to forecast debt interest costs by 2026-27.

FLAWED GOAL

The government's current goal is to have debt falling as a share of GDP five years ahead, but, like other fiscal rules, it is widely accepted to be a flawed goal.

"I am not convinced you should be targeting debt-to-GDP and definitely not in the way the current government is. Maybe debt interest would make more sense to look at but then debt interest itself is subject to big swings," Zaranko said.

The spending plans to assess the debt target are sketchy at best and straddle the upcoming election.

"Going into this Autumn Statement, of the five years in the forecast there are only detailed spending plans for one of them. Four of the five years are just these indicative, provisional totals which nobody really believes in. This means that the further ahead you look the more acute that problem looks," Zaranko said.