MNI INTERVIEW: UK To Ease Debt Target, Avoid Net Worth Target

MNI (LONDON) - There is a strong case for the UK Treasury to exclude the new National Wealth Fund and British Business Bank from its debt target if as expected it replaces its current rules in the Oct 30 Budget, former senior Treasury and Office for Budget Responsibility official Andy King, told MNI.

The Treasury aims to boost lending and other activities by the BBB and NWF, and King, now at Flint Global, said that the best approach would be to keep them on balance sheet but outside any new fiscal rule. (See MNI INTERVIEW: UK Borrowing For Investment Risky - OBR's Miles)

"The rationale for that ... is because the Treasury will be better off regulating the risk as though they were banks, as opposed to regulating the fiscal risk as though they were public spending ... At the moment, the fiscal target limits their growth … they're very small relative to those in other countries, and they will stay very small unless their growth is not limited.”

While there has been speculation the Treasury could adopt a target based on Public Sector Net Worth, a measure which includes the widest range of assets and liabilities, a PSNW-based rule would impose no constraints on investment and so would not be coherent, King said. More plausible options would be to either tweak the current rules or replace their narrow definition of debt with a broader measure of public financial liabilities, freeing up fiscal space.

"My hunch is that the Treasury will be choosing between Public Sector Net Financial Liabilities which is an ONS measure, part of the national accounts, or doing something bespoke with Public Sector Net Debt," King said in an interview.

PSNFL is a broader measure of indebtedness than PSND as it includes a range of future liabilities while netting off assets from which the government anticipates a financial return. 

PSNW TARGET UNWORKABLE

While Chancellor Rachel Reeves has mentioned the case for using PSNW, King is clear a target based on this measure would be unworkable. (See MNI INTERVIEW: UK Has Little Fiscal Space Even If Rules Change)

"If you had a target for public sector net worth, it would never bind, because if you're running a current balance, then [PSNW] will be improving because of the arithmetic of debt dynamics, and it gives no limit on public investment," he said.

"My proposal is essentially saying … treat the policy banks in a PSNFL way, and everything else in a PSND way. Or you could just say, why not treat everything in a PSNFL way?”

Moving to a PSNFL target appeals as it "is like a corporate-balance-sheet way of thinking about things. That's all financial assets and financial liabilities. I think the principle case for PSNFL is that it's just a better measure of the balance sheet.”

If the debt rule were simply to be tweaked one option which has been floated would be to switch from the current exclusion of the Bank of England to including the BOE, as the timing of losses booked from quantitative easing and tightening would work in the Treasury's favour. (See MNI INTERVIEW: UK Likely To Restore BOE To Debt Calculation)

“Clearly, they can't keep the debt target as tight as it was. I think the logic of PSNW as a target doesn't work, and so you're left with these options in between,” King said.

FISCAL HOLE

With the government committed to current fiscal balance, and facing an overshoot versus spending limits set at the 2024 spring budget first estimated at GBP22 billion and now reportedly higher, gilt issuance is expected to rise.

"I am sure they will come back to the question of how much are they going to raise gilt issuance. That will be very important in the choice of target, the choice of public spending, even the choice of tax measures. They have to consider all of these in the round," King said.

One often-raised objection to taking any state financing outside the fiscal rules is that would lead to a similar outcome as that of the now-abandoned model of the Private Finance Initiative, which saw the state facing endless bills for joint public-private initiatives.

"The Treasury is horribly aware of what's happened with PFI, and so that experience is important and will feature in the decisions that are taken. It's more difficult to get things off balance these days, anyway, because of the way the statistics are done," King said.