No.10 has committed to sticking with its fiscal rules amid calls for the government to reform them in the Autumn Budget.
Recent reports had suggested ministers were considering changing the fiscal rules, which were set by the previous administration and mean net public debt should be falling in year five of the economic forecast.
However, the prime minister's spokesperson said today that the 30 October Budget will “deliver on the robust fiscal rules that were set out in the [Labour Party] manifesto".
The confirmation comes despite calls for reform, including a report from the Institute for Public Policy Research today that says changing the rules could encourage investment and unlock £57bn of spending power.
Labour's general election manifesto reiterated the existing rule, saying the "current budget must move into balance, so that day-to-day costs are met by revenues and debt must be falling as a share of the economy by the fifth year of the forecast".
The manifesto said its fiscal rules were "non-negotiable and will apply to every decision taken by a Labour government".
Fiscal rules 'choke off' investment
The IPPR report, published earlier today, called on Rachel Reeves to use the Budget to begin reforming the fiscal rules, arguing that the existing rules “choke off” investment while omitting key financial indicators.
The think tank said the chancellor should come up with a new target for “public sector net worth” for the existing rule that determines how much it can borrow to invest in the UK’s economic infrastructure.
In its latest report, which is backed by Northern Powerhouse Partnership chair and former Treasury minister Jim O’Neill, the IPPR argued that the government should instead commit to PSNW – a financial measure that considers the value of the government's entire balance sheet – increasing in year five.
Adopting this approach would increase headroom for borrowing to invest by £57bn, according to the IPPR – although it argues that some of that sum should be held back as a buffer.
“There is widespread agreement that higher investment is needed in assets such as railways, digital infrastructure, public buildings and equipment to raise the growth rate. Strategic public investment would act as a catalyst to ‘crowd in’ investment from the private sector,” says the report, which notes that the UK has the lowest public investment rate among the G7 group of leading economies, “severely hampering the government’s growth ambition”.
Unlike the existing debt rule, which does not account for the full set of publicly held assets and liabilities, PSNW is a comprehensive debt target, covering all public sector assets and liabilities.
Net worth is therefore a “more honest” measure when assessing the government’s financial position, including its ability to borrow to invest, according to the report.
The paper echoes a warning from a group of economists last month, who said the fiscal plans inherited by the current government to reduce investment spending as a share of GDP are responsible for an “inbuilt bias” against investment.
“To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability,” they said.
The OECD has likewise warned that Reeves will need to take “significant action” to stabilise the public finances and said current fiscal rules "may lead to short-termism and to a trend deterioration of public finances".
In today’s report, the IPPR argues that the existing rule “does not even work on its own terms of promoting fiscal sustainability” because it omits key financial indicators, such as the cost of debt servicing.
“But it also ignores the fact that public investment can generate significant future returns and can thus be paid for by borrowing. A framework that delivers fiscal sustainability should account for this,” it adds.
Using PSNW instead is “akin to investors in a company looking not merely at a company’s indebtedness, but also at its assets and growth strategy”, the report says.
Long-term, 'wide-ranging framework' needed
The Budget should mark the start of reform, with a “wider rethink” to follow, the report says.
Its author, IPPR senior economist and head of macro Carsten Jung, said targeting public sector net worth instead of net debt “would provide significant additional space to borrow to invest and get the UK building again”.
“But the job won’t be done with this alone. In the long term, we need a more wide-ranging framework that covers the cost of our debt but also reflects future economy-wide impacts of today’s fiscal choices,” he said.
Today’s report proposes a series of changes it says would make the UK fiscal framework “one of the most growth friendly, but also one of the most rigorous, in the world”.
First, it argues that the government should rethink the timeframe of the debt rule to end its sole focus on the difference between years four and five of the economic forecast, which it says is “unnecessarily narrow”.
The government should also put greater emphasis on debt servicing costs, which have little weight under the present system despite the impact of higher interest rates on the government’s day-to-day spending, the report says. “Such an indicator is easy for the public to understand and can also reflect the state of the economy,” it explains.
And it should develop metrics that better reflect the future impact of today’s fiscal policy choices, such as infrastructure investment versus tax cuts, the report says – adding that institutions such as the International Monetary Fund “routinely conduct this type of analysis” when assessing countries’ public finance.
Finally, the report says the rules should reflect the benefits of making the economy more resilient against future shocks such as an energy crisis.
In a foreword to the report, Lord O’Neill, who was commercial secretary to the Treasury under David Cameron and Theresa May, said the report sets out how the government can embed a “more long-termist approach” in the fiscal rules.
“Focusing on a more comprehensive debt metric – such as public sector net worth – would provide greater room for borrowing to invest in line with more credible transparent rules on deficits and debt. It would also bring fiscal rules more in line with how financial markets think about fiscal sustainability,” he said.
“I applaud IPPR's recommendations – they take us towards a more comprehensive framework that encourages productive investment and long-term thinking. The UK direly needs it,” he added.
Report author Jung said the Labour government has been elected on a platform to move the UK out of its “low growth trap”, caused by three decades of ultra-low investment, “but has inherited fiscal rules that neither promote growth nor succeed on their own terms in delivering fiscal sustainability”.
"The UK has a proud history of pioneering fiscal institutions with high credibility that are copied elsewhere in the world, such as the Office for Budget Responsibility. Starting a clear-headed reform process now could make the UK fiscal framework one of the most growth friendly, but also one of the most rigorous, in the world,” he added.