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.

     --MISLEADING

     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

stress.

     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

rail-fares.

     "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

costs.

     "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: jason.webb@marketnews.com

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