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| Saturday 26th October 2024
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| Hi Friend,
Changing The Fiscal Rules ... Kerfuffle over Persnuffle or Plain Vanilla Fudge
So What has Rachel Reeves Said ...
"The Budget next week will deliver on the promise of change. That change will be driven by this government's number one mission to deliver sustainable growth after a decade and a half of stagnation.
But growth can only be built on stable foundations. So my first and most important job next week at the despatch box is to turn the page on years of instability and uncertainty which have, for far too long, deterred investment and undermined business confidence.
That is why my fiscal rules are so important: they will be the rock of stability at the core of my Budget. They will set the basis for stable fiscal policy, prudent management of day-to-day spending and responsible investment for growth.
My fiscal rules will do two things. The first and most important: my stability rule will mean that day-to-day spending will be matched by revenues.
My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy. That will make space for increased investment in the fabric of our economy, and ensure we don't see the falls in public sector investment that were planned under the last government."
Why change the rules? What Are The Current Fiscal Rules?
In simple terms, debt should be on course to fall as a share of national income in five years time and Public Sector Borrowing should not exceed 3% of GDP in five years time. The good news for government, the hard task is always at the end of the forecast period. It's always five years away.
Rachel Reeves, has a problem. The Chancellor has committed to a rule that public debt should be falling, relative to the size of the UK economy, between the fourth and fifth year of the forecast period.
UK fiscal rules are designed to limit public sector net debt as a percentage of Gross Domestic Product. Gordon Brown's target in his ten years of tenure as Chancellor was that debt should not exceed 40% of GDP. How things change! Rachel Reeves is battling at the present time to hold the critical ratio below 100%.
At the end of March 2024, debt as a percentage of GDP was 98% of GDP, forecast to fall to 94% of GDP by the end of the 2028/29. This before the discovery of the Black Hole and the reality of a projected over run this financial year alone of almost £40 billion.
The Chancellor has announced, from now on, the government will target Public Sector Net Financial Liabilities (PSNFL) rather than Public Sector Net Debt (PSND). Affectionately known as PERSNUFFLE with one bound the government is free from the GDP constraint.
At the end of March 20024, PSNFL as a percentage of GDP was a far more manageable 83% of GDP forecast to fall to 79% by the end of the forecast period.
Public Sector Net Debt was estimated to be £2,699.6 billion at the end of March 2024 compared to an estimated PSNFL value of £2,285.2 billion, a difference of £414 billion.
By 2028/29 Public Sector Net Debt is estimated to be £3,078.1 billion at the end of March 2029 compared to an estimated PSNFL value of £2,569.4 billion, a difference of £509 billion.
As of March 2024, switching to a PSNFL target would have added £53 billion of spending 'headroom' compared to the PSND ex BoE target.
In next week's budget statement, Rachel Reeves could spend £60 billion to £80 billion more than under the old rules. The Shuffle to Persnuffle pays off ...
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| | So What do we mean by PSNFL ...
Public sector net financial liabilities (PSNFL) is a wider measure of the government balance sheet than public sector net debt (PSND). It includes all financial assets and liabilities recognised in the National Accounts. Sources of differences between the two measures include financial assets, such as student loans and equity stakes in financial institutions acquired during the financial crisis. They net off against PSNFL but not PSND. Additionally, some liabilities add to PSNFL without affecting PSND, including net pension liabilities for funded pension schemes.
In simple terms, PSNFL is lower than PSND, because the net liability reflects the asset and the liability or debt, rather than just the debt.
The main asset or liability is funded pension schemes, such as local government schemes. The assets held by these schemes are counted on both sides of the balance sheet, the asset and the liability. Total LGPS assets have grown from £290 billion in 2019 to £366 billion in 2022.
The most important other assets included in PSNFL but not fully reflected in PSND are outstanding student loans worth some $236 billion at the end of March 2024, The Government forecasts the value of outstanding loans to reach around £500 billion by the late-2040s.
The difference between PSND and PSNFL is largely driven by the differential treatment of student loans. PSNFL includes the portion of student loans expected to be repaid as an asset, while PSND does not.
Loans issued by the Bank of England under the Term Funding Scheme (TFS) are also included. The OBR assumes that all £127 billion of these loans (5.0 per cent of GDP in 2023-24) redeem over the forecast period.
So What Does The Market Make of It All ? So far so good, the market has responded well to the news. Sterling at just under $1.30 has changed little in the week. We always thought the fall from $1.34 was a trend correction anyway.
Ten year gilts yields have moved up by twelve basis points to 4.22. We still expect a normality of 4.00 to 4.50 to be the norm. Thirty year gilts now trade at 4.75. The Bond Vigilantes are taking a close look.
No Liz Truss trauma due next week. Markets like the idea of spending to invest. The IMF has been clear that weak investment and low productivity are holding back growth in the UK. The IMF has given a blessing to the shuffle to persnuffle. It is the preferred international measure in any case.
The "dual" mandate of fiscal prudence and a growth agenda no longer a "duel" mandate? We shall see next week, if a real conflict in objectives can be avoided ...
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| Have a great weekend ...
John
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References This week's post relies on extracts from our daily "What the Papers Say Review." Certain research and photo content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from Adobe Stock and The Saturday Economist Slide Deck.
1 Student Loan Statistics House of Commons Library.
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| © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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