In a letter to the Chancellor sent ahead of the Budget, ICAEW called on the government to look again at the fiscal rules and fix the underlying debt measure it uses. This would allow for an increase in the investment the UK needs for growth, as part of a long-term fiscal strategy to put the public finances on a sustainable footing.
The current underlying debt measure that excludes quantitative easing (QE) liabilities is flawed, and replacing this would be a positive first step to support long-term investment.
But the Institute warned that moving too aggressively to change the fiscal rules could undermine market confidence in the government’s commitment to stable public finances, especially if the rule change was perceived as signalling a permanently higher level of indebtedness. Investors understand that borrowing for investment can produce significant benefits for both the economy and the quality and efficiency of public services, ICAEW said, but they want to feel confident that there is a coherent plan to ensure the public finances are sustainable in the long term.
ICAEW said there were a range of options open to Chancellor Rachel Reeves as she considers any changes she might want to make to the fiscal rules. For example, she could opt to incorporate a wider range of financial assets into the definition of net debt, including business lending through the National Wealth Fund or the UK Infrastructure Bank.
The government could also include non-financial assets in the calculation, which would involve dropping a fiscal target for debt and adopting a net worth measure. The latter approach would incorporate a wider range of public liabilities beyond debt and take account of financial and non-financial assets.
However, ICAEW raised concerns over the experimental measure of net worth published by the Office for National Statistics and questioned whether it would provide a good foundation for a formal fiscal target.
Alison Ring, ICAEW Director, Public Sector and Taxation, said:
“It’s positive that reports suggest the Chancellor is considering changing the debt rules that constrain the government’s ability to invest more over the medium and long-term.
“Replacing the flawed measure of underlying debt would provide a moderate amount of additional headroom for investment under the current fiscal rules, but more importantly, would avoid independent decisions of the Monetary Policy Committee on quantitative tightening inadvertently affecting fiscal choices.
“This would not be a fudge to massage the public finances but instead would be a sensible reform sending a strong signal to international investors that economic growth is a priority.
“But it is crucial that the Chancellor proceeds with caution, as moving too quickly to a net worth measure could see markets question the government’s commitment to put the public finances on a sustainable footing.”
You can view ICAEW’s full Budget submission here.
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CONTACT: ICAEW media office at tom.mackintosh@icaew.com or 07866 853841