In a bold move that could reshape the UK’s economic landscape, Chancellor Rachel Reeves is set to unveil a radical overhaul of the nation’s fiscal rules in the upcoming budget. Drawing inspiration from New Zealand’s successful net worth approach, Reeves aims to unlock billions of pounds for long-term infrastructure projects while ensuring sustainable public finances. This seismic shift in fiscal policy has the potential to redefine the UK’s economic trajectory and address the pressing challenges of underinvestment and mounting debt.
A Lesson from Down Under: New Zealand’s Net Worth Approach
New Zealand’s fiscal rules, which have remained unchanged since their introduction in the 1990s, serve as a shining example of prudent economic management. The nation’s net worth target takes into account not only liabilities such as government debt but also assets, including land, roads, railways, hospitals, schools, and even military equipment. By focusing on the bigger picture, New Zealand has successfully reduced its debt-to-GDP ratio and fostered a culture of efficient asset utilization within the public sector.
A really good understanding of what assets you’ve got in the public sector is important, including how you generate revenue from them. In a lot of countries, governments own vast assets that are poorly utilised.
Ian Ball, Architect of New Zealand’s Fiscal Reforms
Adapting the Model: UK’s Public Sector Net Financial Liabilities
While Reeves has opted for a narrower measure called public sector net financial liabilities (PSNFL), which accounts for financial assets such as student loans and company shares but excludes physical assets, this move still represents a significant departure from the UK’s current fiscal rules. By changing the way the government’s debt rules are calculated, Reeves aims to create additional headroom for much-needed infrastructure investments while maintaining fiscal discipline.
Overcoming Challenges: Valuation and Transparency
Adopting a net worth approach comes with its own set of challenges, particularly in valuing assets that lack readily available market prices, such as social infrastructure and military equipment. To address these issues, New Zealand introduced more regular and detailed accounts, along with incorporating private sector practices into its civil service. Reeves has hinted at similar measures, including strengthening the National Audit Office and establishing a new Office for Value for Money to ensure borrowed funds are well-spent.
Balancing Act: Debt Stabilization and Investment Needs
While the UK’s debt levels remain a concern, with the debt-to-GDP ratio nearing 100%, economists argue that the nation’s primary challenge lies in finding ways to overcome years of chronic underinvestment within a tight fiscal position. The International Monetary Fund (IMF) has emphasized the need for the UK to address pressing service delivery and investment needs, including the green transition, while stabilizing debt in the medium term.
The main fiscal policy challenge is how to address pressing service delivery and investment needs, including for the green transition, while assuredly stabilising debt in the medium term.
International Monetary Fund (IMF) Article IV Review of the UK
A New Era for UK Fiscal Policy?
As Chancellor Reeves prepares to unveil her groundbreaking budget, the UK stands at the precipice of a new era in fiscal policy. By drawing lessons from New Zealand’s successful net worth approach and adapting it to the UK’s unique economic landscape, Reeves aims to strike a delicate balance between debt stabilization and strategic investment. While challenges lie ahead, this bold move has the potential to reshape the nation’s economic future and address the pressing needs of a post-pandemic world.
The upcoming budget will serve as a litmus test for Reeves’s vision, as she seeks to persuade both the public and financial markets of the merits of her radical fiscal rule changes. As the UK navigates uncharted economic waters, the world will be watching closely to see if this daring gambit pays off, potentially setting a new standard for fiscal policy in the 21st century.
