UK’s fiscal framework needs a radical overhaul to be fit for purpose amid economic and political change  

The government must set a new fiscal framework that goes beyond the traditional focuses on debt and the deficit and targets the state’s net worth, in order to meet the country’s big economic challenges over the next decade, according to a new report published today (Tuesday) by the Resolution Foundation.

Totally (net) worth it – notes that the UK pioneered the use of fiscal rules over 20 years ago, but is now operating without any effective fiscal framework in place. With large spending pledges alongside bad economic news leaving the government on course to miss its main deficit target by around £16bn next year, the report says that now is the time for the Chancellor to radically overhaul the UK’s fiscal framework.

It adds that the cancellation of the Budget in early November provides the current Chancellor with more time to fully consider and consult on what the UK’s new fiscal rules should be. They should reflect:

• Economic change: the era of low interest rates means that fiscal policy will need to play a bigger role in responding to downturns. This requires firm but flexible rules that are more constraining in good times, and escape clauses to ensure fiscal policy can support the economy in bad times without the framework beingjettisoned entirely as soon as a downturn hits.
• Political change: both main parties want to borrow more to invest, and Labour favour a range of nationalisations. Any new framework therefore needs to allow governments to take the opportunity of record low borrowing costs, and provide a strong incentive to invest in things that create real value for current and future generations.

The report says that in setting a new fiscal framework, the Chancellor should learn from past UK experience. In particular, the lesson that ‘what gets excluded gets exploited’ should discourage a narrow focus on debt that has encouraged the growth of off-balance sheet liabilities, such as PFI contracts. To avoid this, the next set of fiscal rules should take account of all public sector assets and liabilities, as any private company would.

In order to set a fiscal framework that fits current economic realities and the big challenges of the next decade – from responding to a recession, to modernising the nation’s infrastructure and tackling climate change – Totally (net) worth it proposes three new fiscal rules, which would represent a radical break from the current framework. They include:

• A net worth objective. A commitment to improve public sector net worth as a share of GDP over a fixed five-year term would hold future Chancellors to account for both sides of the ‘borrow-to-invest’ equation by capturing both what they’re borrowing and what they’re buying – from new hospitals to state-run rail and utility companies.
• A structural current balance target. Aiming to achieve a cyclically-adjusted public sector current balance of +1 per cent of GDP (and no less than -1 per cent of GDP in outturn) would allow the government to borrow to invest, while also ensuring the current receipts and spending are broadly in balance.
• A debt interest ‘ceiling’. By limiting the share of total public sector revenue spent on debt interest to 10 per cent, the government would ensure that the overall debt burden remains sustainable by taking account of not only the volume of debt, but also its cost and the government’s ability to service it.

The Foundation says that in the event of a December election, all the main parties should include their proposed fiscal rules in their manifestos as it will provide vital context for their economic priorities.

Richard Hughes, Research Associate at the Resolution Foundation, said:

“Fiscal rules have guided, if not always bound, tax and spending decisions over the past 20 years – from Gordon Brown’s golden rule to George Osborne’s goal of eliminating the deficit.

“But with the UK’s current fiscal rules set to expire next year, and the government on course to miss them by £16bn anyway, the Chancellor should take this opportunity to rewrite the fiscal rule book and set a new framework to guide government policy over the coming decade.

“The UK’s new fiscal rules should reflect current economic realities such as record low interest rates, and the broad political consensus around the need to invest in improving productivity, tackling climate change, and renewing our public service infrastructure. Crucially, they should look beyond our narrow focus on debt and the deficit, and target the wider balance sheet of the state so citizens can see both sides of the ‘borrowing to invest’ equation.

“By targeting public sector balance sheet, the government can give the public a much clearer idea of what their taxes and borrowing is buying– be it refurbished hospitals, new infrastructure, or nationalised companies.”