One option would be to come up with rules that not only assess debt but also the country’s assets. In some ways this isn’t such a radical suggestion. Investors can only tell whether a company’s balance sheet balances because it contains both liabilities and assets. Why shouldn’t countries conduct a similar audit?
Part of the answer is that the switch to this kind of system would be expensive. Another is that it can be hard to value national assets – like roads and hospitals – that you can’t really sell.
On the flip-side, if you don’t put a price on the nation’s infrastructure, there’s no incentive to invest in it and eventually, as we can now so clearly see, everything starts turning to dust. What’s more, there’s nothing to stop assets that can be sold getting flogged off for less than they’re worth to fund fiscal bungs.
A side benefit of adopting this approach would likely be greater latitude from the market to borrow against public assets. As Andy Haldane, the former Bank of England chief economist and an advocate for new fiscal rules, says: “Financial markets know it is the value of the house, not the mortgage, that matters.”
Debt-based fiscal rules also cause governments to pull in their horns when economic shocks hit, often accentuating the downturn, rather than helping to boost growth in the hope of ensuring the dip is as shallow as possible.
New Zealand, often a pioneer in monetary and fiscal matters, adopted this approach in the 1980s and has produced pretty consistent primary budget surpluses since. The IMF has been encouraging other countries to follow suit for years.
In a little-noticed passage of her recent Mais Lecture, Reeves made a commitment “to report on wider measures of public sector assets and liabilities at fiscal events, showing how the health of the public balance sheet is bolstered by good investment decisions”.
Does this mean that Reeves, freshly installed in Number 11 Downing Street, would tear up the old fiscal rules and start assessing the nation’s finances in a more holistic manner?
That seems very unlikely.
Labour will need a couple of years of steady-eddying before the markets trust it to make such a big move. Ultimately, the short-term plan, such as it is, boils down to sitting tight and hoping a cessation of political chaos results in at least a modest improvement in the outlook.
But if Labour does get lucky and the economy starts growing, Reeves may eventually have the wiggle room to be a little more radical. My hunch is the promise she’s most eager to break is that of sticking to her predecessor’s fiscal rules.
If it’s not, it should be.