Rachel Reeves is in a bind. Not just because of ‘did they or didn’t they’ arguments about whether Labour fibbed about long-planned tax rises during the election, or because all those bushy-tailed new Labour MPs and battle-scarred union bosses want the Chancellor to raise public sector spending even higher. But because she’s promised ‘sound money’ rather than a borrowing binge, spending cash we haven’t got.
How to escape from the fiscal vice? By publishing a new national balance sheet which recognises the value of some publicly-owned assets, Reeves is hoping to prove that there’s fiscal headroom to justify extra Government borrowing and debt.
It’s not a stupid idea either. The figures show a net surplus of public assets over liabilities of between 60% and 100% of GDP, depending on which approach she chooses, so surely it’s safe to borrow a bit more, right?
Sadly not. The problem is that those figures leave out important long-term commitments embedded in our welfare-state National Insurance (NI) schemes. Things like the future costs of the state pension, which are spiralling because of our ageing population and which any commercial pension or insurance company would have to include in its balance sheet. The value of these missing liabilities is very large: the state pension alone is over 220% of GDP, without including any of the other working age and retirement benefits in the NI system. Reporting them accurately would wipe out the Chancellor’s net balance sheet surplus, and leave her with a net deficit of at least 160% of GDP. Rather than creating fiscal headroom to justify extra Government borrowing and debt, an honest national balance sheet would reveal the exact opposite. If the welfare state were a pensions or insurance company like Aviva or the Prudential, the regulators would already be closing it down. If Reeves wants to make a case for more borrowing, this isn’t it.
But there’s still the germ of a really good idea in there somewhere. It makes sense for governments to publish balance sheets, for the same reasons that companies do. They make it harder for politicians to game spending controls by postponing costs for future generations to pay, for example by introducing unfunded changes to the benefits system, selling strategic assets to pay for day to day spending, or failing to maintain infrastructure like roads or railways properly so they lose value over time.
Balance sheets could make us greener too. Every time we dig a mine or drill a well we are reducing the store of long term environmental capital that nature has given us. So we ought to invest the proceeds in things that will last just as long, and which are worth the same or even more than what’s been taken. Otherwise we’re just selling off the family silver, and our grandchildren won’t have anything to show for it.
So a national balance sheet is a really good idea in principle, if only Rachel Reeves wasn’t using it to paint a lopsided and artificially-optimistic picture to justify extra borrowing and bigger debts. If she doesn’t change her plans, interest rates will rise, hobbling economic growth as companies find it harder to invest, and the cost of living will soar as mortgages get more expensive too.
Luckily, it’s a problem that is easily fixable. The answer is to publish updated figures which include the missing costs to paint a more accurate picture of taxpayer-funded finances, and then update the fiscal rules so governments have to improve them each year. If we do, interest rates will be lower, economic growth will accelerate as companies find it easier to invest, and the cost of living will fall as mortgages get cheaper too. We would reinforce the UK’s reputation as a safe, stable, predictable and commercially-attractive place for jobs, investment, wealth-creation and business growth. We would be greener, by recognising when we are extracting environmental capital for the first time ever. And we would become generationally fairer by stopping politicians making expensive promises for future generations to pay.
If Rachel Reeves is serious about transforming the UK’s economy and creating a political legacy for herself at the same time, this would be a good place to start.
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