Rachel Reeves will this week change the way the UK government’s debt rules are calculated to unlock billions of pounds in additional headroom for spending on long-term infrastructure projects.
In what could be the most radical step in Labour’s first budget since 2010, the chancellor confirmed the decision while at the International Monetary Fund’s annual meeting in Washington DC last week, aiming to soothe any jitters in the bond markets by announcing it in front of the global economic establishment.
The rationale for the budget sneak peak in Washington was clear. The IMF has become an advocate of governments borrowing for investment in recent years. It also backs debt rules that take into account not just the cost of borrowing but also the benefits.
However, the chancellor could have gone further on her world tour to tee up Wednesday’s tax and spending set piece – to New Zealand, where the government has focused on both its assets and liabilities for the past three decades.
Since the 1990s, New Zealand has included a target in its fiscal rules to ensure net worth remains at a level sufficient to act as a buffer to economic shocks. The measure takes into account liabilities, including government debt, but also assets, including land, roads, railways, hospitals, schools, fire stations and military aircraft.
It’s a measure Reeves has explored. However, the Guardian has been told by a senior government source that she has picked a narrower measure: public sector net financial liabilities (PSNFL), nicknamed “persnuffle”. This accounts for financial assets, including student loans and company shares, but not physical ones.
Still, the chancellor could set a supplementary net worth target with a view to focusing government attention on the benefits of investment. Treasury sources have said Reeves is keen to change the “culture” of the institution to do so.
New Zealand’s approach has similarities with Britain’s position. The Wellington government, as London has over recent years, had been through a string of economic and fiscal crises before it moved to adopt a net worth target. But there are also differences. Rather than moving the goalposts to free up more room for investment spending, New Zealand’s decision was taken to focus attention on reducing its national debt pile.
Ian Ball, who was the architect of New Zealand’s reforms during his time as a senior Treasury official, says the background is important. “It was a Labour government, but at the time I would think some of their reforms would be described as among the most rightwing in the world. New Zealand moved basically from being facetiously referred to as the Albania of the south Pacific to one of the most economically free countries in the world.”
Successive governments had run budget deficits for decades in the hope of rescuing New Zealand from years of crises and recessions – including the loss of trade from the UK joining the EU common market in 1973, and oil price shocks.
The government launched its fiscal rules in 1994 to signal to investors it was committed to sustainable public finances, as most advanced economies now do. But its rules were broad in nature, including a target to maintain “prudent” debt levels, alongside its net worth rule.
Britain rarely records budget surpluses, having done so only five times since 1970, most recently in 2000-01. However, the UK economy is significantly larger than that of New Zealand. Still, London has tested its creditors recently; through Brexit, years of political instability, and Liz Truss’s mini budget. Debt is near 100% of GDP, the highest level since the 1960s.
Unlike in New Zealand, which has a net worth of NZ$191bn (£88bn), about 46% of GDP, the UK’s net worth is in deficit, by £731bn.
The UK changes its fiscal rules faster than almost any other OECD country, with nine sets since they were first introduced in the 1990s. The Tories replaced them seven times since 2010. Helped by their broad definition, New Zealand’s have never changed.
Debt as a share of New Zealand’s economy fell from almost 50% in 1994 to 16% before the 2008 financial crisis. It has since risen but remains below 50%. The net worth target helped, says Ball, by focusing the attention of government departments to drive efficiencies.
“A really good understanding of what assets you’ve got in the public sector is important, including how you generate revenue from them. In a lot of countries, governments own vast assets that are poorly utilised,” he says.
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“What I read in the UK is there’s a temptation to choose a fiscal rule that gives you more fiscal headroom. That was absolutely not the objective in New Zealand. It was to find a way to get the government finances to have less debt, not more.”
Labour sources suggest Reeves will not utilise the full headroom that changing the fiscal rules could unlock – a possible £50bn or more under PSNFL. She has also spoken of the importance of “guardrails” to ensure borrowing is well spent, including beefing up the National Audit Office and a new Office for Value for Money.
Part of the problem with the net worth approach is the difficulty in valuing certain assets, particularly ones without readily available market prices, including social infrastructure such as schools and hospitals, and military equipment.
Ball says that as well as the right fiscal rules, wider changes are important to overcome this. New Zealand introduced more regular, detailed accounts, and brought in more private sector practices into its civil service.
Now a professor of public finance management at Victoria University in Wellington, Ball is a co-author of the book Public Net Worth with other leading economists and accountants. He thinks Britain has little to fear from the financial markets with a switch to a net worth target. But only as part of wider reforms.
“If they see enough being done, that the government is serious about fixing the problem [of high debt]. To me that’s the test. Are they persuasive? Are they serious about this?”
However, most economists believe Britain’s big problem is not the level of debt, but finding ways within a tight fiscal position to overcome the consequences of years of chronic underinvestment.
Earlier this summer the IMF wrote in its Article IV review of the UK: “The main fiscal policy challenge is how to address pressing service delivery and investment needs, including for the green transition, while assuredly stabilising debt in the medium term.”
Ball says there could still be lessons from New Zealand. “We still have a lot of assets which aren’t used well. But at least we know what they are and have a way of tracking of them.”
