Both sense and nonsense on borrowing rules

The last month has seen a burst of activity and announcements that confirm how important it is that we have proper reform of the UK borrowing rules.  First, and most dramatically, the government finally announced the sale of the Royal Mail, accompanied by pronouncements that it has no alternative because otherwise its investment needs would be met at the expense of schools and hospitals.  What a pity that Labour didn’t extol the virtues of a public corporation as the perfect vehicle to (in the words of Michael Fallon, the coalition’s business secretary) “combine the best of the public and private sectors”.  It was Labour, after all, that gave the Royal Mail that status and its business independence in the first place.

Labour could have used the government’s own arguments against it, as with no apparent sense of irony or embarrassment about the timing, only a couple of days after the Royal Mail was put up for sale the government was itself saying how wonderful public corporations could be.  This time they were talking about the future of the Highways Agency, which is to become a public corporation so as to give it “long-term funding certainty and flexibility which will enable it to deliver capital efficiencies”, including partnerships with the private sector. Isn’t this just what the Royal Mail already has?

Across in the transport sector, a couple of weeks ago we had the news from the RMT union that 60% of our railways are run by foreign, state-owned companies.  These are of course public corporations, they just happen to be French, German or Belgian ones, which aren’t saddled with the same constraints on their borrowing as British ones are. Indeed, they even enjoy the lower borrowing costs of being state-owned enterprises.  No such advantage is held by the only British public corporation in the rail sector, the glamorously named Directly Operated Railways, which manages the East Coast mainline. It’s just been announced that the franchise will be put out to competition, and there is presumably every chance that a foreign company will take it over, despite DOR’s success.

In the housing sector, Vince Cable used his license to take potshots at government to criticise them about their borrowing rules.  The LibDems have long had a line, to be set out again in a resolution to their next conference, that borrowing rules should be reformed to accord with international standards and facilitate more housing investment. Cable didn’t quite say this though, but managed to imply that simply by allowing the current borrowing headroom to be shared between councils, they could build an extra 15-25,000 houses per year.  This seems wildly optimistic, given that the estimate in last year’s report Let’s Get Building was that output might reach 60,000 over five years if borrowing caps were removed completely, a far more radical measure.

If we were looking for sensible comment about public corporations and the borrowing rules, what better place to turn to than the Fabian Society? They’ve just launched the first report of their commission on future spending choices, called Spending Wisely, and it does indeed contain a concise and well-worded statement of the case for changing the rules. It is worth quoting in full:

“[An] option for accounting reform would be for the government and Office of National Statistics to review how some borrowing by public institutions is classified for the purpose of the national debt. This can be justified if these bodies make self-financing investments for which the Treasury is unlikely to ever need to assume liability. The UK uses a broader definition of debt than most economies. Shifting to using the headline measure of ‘general government’ rather than ‘public sector’ debt would bring the UK into line with many other EU countries and with standard measures used by the European Commission, IMF and rating agencies. The UK could also benchmark itself against other nations and aim to adopt any practices which prevent artificial hindrance of commercially sound borrowing. For example we heard that in Germany state-owned regional banks and public house-building programmes are largely excluded from headline national debt.

“However, any reform would need to be tightly supervised by independent agencies to provide reassurance that it would not undermine overall fiscal discipline. The OBR as well as the ONS would need to sign-off implementation to avoid any slight-of-hand during the transition; and tough independent supervision of local government and public corporations would be needed to ensure that their borrowing is affordable.”

This is a very welcome endorsement of the case for change. Naturally, Red Brick commends the Fabian Society arguments to Labour’s front bench teams, and especially to Ed Balls and his shadow Treasury colleagues.

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2 Responses to Both sense and nonsense on borrowing rules

  1. Pingback: Beware false prophets | Red Brick

  2. Ken Lee says:

    interesting that we ditch RPI as it doesn’t conform with European comparison, but we seem unable to make the same decision about debt!

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