The Treasury should take a more holistic approach to running the nation’s public finances which would permit greater public investment and hold politicians to account for the additional spending, the department’s former head of fiscal policy said on Sunday.
Richard Hughes, who left the Treasury in April, said significant progress in measuring the value of state assets would allow the government to manage its finances like a company rather than solely looking at the debt it has accumulated.
This greater focus on recognising the value of new public sector assets, such as aircraft carriers, roads or HS2, would give ministers greater scope to significantly increase spending on public infrastructure.
Ideas similar to those in Mr Hughes’ paper are already being examined closely in Treasury because they appeal both to the new Boris Johnson government and Jeremy Corbyn’s opposition Labour party, which have both promised heavy investment in infrastructure.
If Sajid Javid loosened the existing rule insisting that public sector net debt should fall as a share of national income, and augment it with a rule seeking to improve the net worth of the UK public sector, it would allow the chancellor to make good on his “first priority” to rebuild the country’s infrastructure.
It would also be welcomed by Labour as it would relax the constraint John McDonnell, the shadow chancellor, faces in funding the party’s £250bn national infrastructure plan, nationalisation of industries and even more ambitious plans for a carbon-free future by 2030.
“With interest rates at historic lows, and political leaders from both main parties wanting to borrow to invest, the time has come for the UK’s fiscal rules to move beyond its traditional narrow focus on debt and deficit, and include targets that encompass the wider balance sheet of assets and liabilities,” Mr Hughes said.
A move to encompass assets as well as liabilities would also help stop the government selling assets at low prices. These disposals may lower public debt levels but often provide poor long term value to taxpayers.
It would increase the incentives for ministers to invest in new assets that would be financed either by new revenue streams or enhanced economic performance and higher future tax revenues.
Mr Hughes said the current debt and deficit rules do not allow scrutiny of the rhetoric of politicians, who often justify public spending as investments that pay for themselves in the long run.
“This growing gap between stated fiscal aims and measured fiscal reality risks degrading the political salience of fiscal rules on the one hand and allowing politicians to evade fiscal accountability on the other,” he said.
The government should not ignore the liability side of the balance sheet entirely, he added, especially if there was a concern about the ability of the public sector to raise funds in the debt markets at a reasonable price.
In recent years, the Office for National Statistics and the Treasury have made efforts to improve measurement of the UK’s public sector balance sheet.
These assessments show that the UK government’s net worth is negative as a result of successive privatisation programmes since the 1980s combined with high public borrowing. This has left Britain second bottom in an international league table produced by the IMF last year.
More work would be needed to improve the frequency with which the statistics were produced, Mr Hughes said, if the balance sheet measures were to become operable rules in government.
“Given the scale of public sector balance sheets, with assets of over £2 trillion and liabilities over £4 trillion, the modest effort needed to achieve this is almost certainly worth it,” he said.
