British finance minister Rachel Reeves has suggested she will give the country’s new government more leeway to borrow as part of her attempts to get the economy growing more quickly.
Here some options which could give more wiggle room for borrowing and spending to Reeves, who is mindful of the chaos that engulfed Britain’s bond markets in 2022 when former prime minister Liz Truss promised huge, unfunded tax cuts.
WHAT IS THE MAIN RULE?
The main fiscal rule set by the former Conservative government required debt to be falling as a share of gross domestic product between the fourth and fifth year of projections produced by Britain’s official budget forecasters.
In their most recent projections in March, the forecasters estimated that the then Conservative government was on track to meet this by a narrow margin of 9 billion pounds ($12 billion).
Economists said the forecasts implied spending cuts to areas outside health, schools and defence.
Since then Reeves, whose Labour Party took power in July, has said there is a further 22 billion-pound hole in the public finances for this financial year alone.
Reeves said before the election that she would change another of the government’s fiscal rules by removing public investment from annual budget deficit calculations.
WHAT KIND OF DEBT?
One possibility for Reeves would be to change the measure of debt used in the fiscal rule.
The rule excludes a temporary BoE lending scheme to banks and takes a different accounting approach to the older public sector net debt measure for the years in which losses from quantitative easing are booked.
The Institute for Fiscal Studies think tank estimated last month that switching back to the older debt measure would create around 16 billion pounds in extra headroom.
EXCLUDE THE LOSSES
Another option would be exclude the losses incurred by the Treasury from the BoE’s past asset purchases. The central bank is selling gilts at prices lower than those it paid for them and now pays banks a higher interest rate for cash than it receives in coupons from the bonds it bought. Unlike other central banks, the BoE sends the bill for these losses to the government.
Last month the BoE estimated the cost of this would be 20-30 billion pounds a year over the coming years, although this depends heavily on the path for interest rates and gilt sales.
OFF THE BOOKS
Media reports said Reeves was considering a change to move the government’s new National Wealth Fund, which seeks to leverage private investment with initial public funding, and GB Energy, a holding firm overseeing the push for green power, off the government’s books.
Andy King, a former senior official at the Office for Budget Responsibility, has said that could give Reeves another 15 billion pounds more headroom for borrowing, the Guardian newspaper reported.
VALUE THE ASSETS
A more fundamental change would be to switch the fiscal rules away from looking only at debt levels to a broader measure which also takes into account the value of public assets.
Public sector net worth (PSNW) could encourage governments to focus on investing in high-quality projects, the IFS said in a report last year.
But the IFS also warned of potential problems with switching exclusively to the PSNW measure including the difficulty of valuing assets such as road networks which cannot be sold easily and therefore could not justify higher borrowing. Traditional measures of debt would remain important for fiscal policy, it said.
($1 = 0.7479 pounds)
（By William Schomberg and David Milliken）
