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MNI INTERVIEW2: New UK Fiscal Rules Likely Flawed: OBR's Bean

By David Robinson
     LONDON (MNI) - Any new fiscal rules adopted by the UK are likely to provide
a flawed or incomplete picture of the path of government finances, a top
official at the independent Office for Budget Responsibility told MNI.
     In last week's budget, Treasury head Chancellor of the Exchequer Rishi
Sunak floated the possibility of adopting cutting edge public accounting
methods, such as new ways to measure productivity-enhancing investment,
including human capital. Another option would be to move to public sector net
worth, which involves valuing state owned assets and putting them on the balance
sheet. Such measures would be likely to grant the government more fiscal leeway.
     But Sir Charles Bean, a top OBR official, warned against placing too much
weight on any new rules, particularly if they are once again based on a small
number of specific measures, as these are almost inevitably too easy to game.
Instead, it is essential to ensure public finances subject to scrutiny by
independent bodies.
     "You want rules, or guidelines, which are proof against gaming as much as
you can. It is very difficult to design ones which are practicable and
implementable," Bean told MNI.
     The OBR's numbers that underpinned the March Budget showed the public
finances on track to meet all three current fiscal goals: for the current budget
to be in surplus in 2022-23, for public sector net investment not to exceed 3%
of GDP and for debt-interest-to-revenue not to exceed 6%. The 3% limit was only
hit because the OBR assumed 20% of planned investment would not go ahead.
     Bean is sceptical any new measures would still be flawed.
     "Usually it is the case that whatever stock measure, or for that matter
whatever flow measure, you focus on there is usually something outside it where
you can exploit it," he said.
     A recent example Bean cited was the way the Treasury accounted for student
loans, excluding them entirely from government spending despite knowing, by
design, that much of the lending would be written off.
     "This is one of the arguments that is advanced for looking at a broader
measure like public sector net worth: because everything is inside it you can't
exploit things which are at the boundary," he said.
     The weakness with that, though, is that many public sector assets are both
hard to value and could be impossible to sell at a time when finances are under
     Public sector net worth "can be misleading because there are things that
get scored as assets which might not be .. saleable in the market. You don't
know the valuation of a lot of them so again you can end up with something where
you feel 'Oh, public sector net worth looks alright' and then you have a problem
funding your debt," Bean said.
     "The moral from it is don't think it is enough to pick two or three
indicators and to write down the rule, because of the problems you will get with
any rules," Bean said.
     Instead he stressed the need for independent agencies to provide commentary
on whether the spirit of the rules is being observed and to identify where the
fiscal risks lie.
     Sunak also launched a consultation on reform of the retail prices index,
the flawed measure used for inflation-linked gilts, student loans and
     "To be honest I think the ideal would simply be for the government to stop
indexing anything to RPI at all and just CPI and CPIH whatever you do. You
pre-announce you are going to stop producing it, which is what the ONS has done
at a certain point, and as a result you force the private sector to restate
whatever contracts they have which were written in terms of RPI," Bean said.
     But this solution may not be tempting to a government aiming to minimise
     "What may happen instead is some sort of backdoor redefinition of RPI which
is a way that avoids triggering the redemption clause," Bean said.
--MNI London Bureau; +44 203 865 3829; email:
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