Labour should target national wealth, not debt

Politicians generally agree with economists in saying that investment is a Good Thing. After all, it’s seen as the font of economic growth and prosperity.

And yet so often the public investment that politicians control falls victim to more immediate priorities. But this is not just about being short-sighted. At the heart of the problem are the politicians’ fiscal rules, which focus on debt rather than what really matters, the nation’s wealth. Indeed, the obsession with debt has blinded them to the obvious truth that we need assets if we are to grow the economy and cover our debts.

For all their talk about the need for the UK to catch up with the rest of the world on investment, both the Conservatives and Labour have cut back on planned public investment over the past month. In its latest Budget, the government chopped public sector net investment by £14bn over the next five years to help fund tax cuts in the hope of boosting its poll ratings.

Meanwhile, the Labour Party, embarrassingly slashed its plan to step up investment by an extra £28bn per year as part of its Green Prosperity Plan, despite having championed it for so long. Although this plan was entirely consistent with its own fiscal rule of borrowing to invest, it was concerned that it would fall foul of another rule, shared with the government, which commits it to cutting public debt by the end of the next five years. It feared relentless Conservative attacks about ‘unfunded spending’.

Politicians are fond of talking about the need to ‘balance the books’ while only looking at one side: what the nation owes, but not what it owns. Yet the reality is that making cutting debt the overriding priority is fiscally irresponsible. By ignoring the other side of the balance sheet, public assets, it effectively lumps investment in with current spending (government consumption) as being bad for the health of the public finances.

Successive governments have neglected vital investment and maintenance, progressively eroding the asset base of the public sector. Seeing investment purely in terms of creating debt ignores the fact that it creates the assets crucial to meeting future debt obligations.

It is something of a mystery why Labour have not made ‘only borrowing to invest’ its primary fiscal rule. Its whole programme is infused with talk of the need to promote growth, wealth and prosperity. The ‘borrowing to invest’ makes sense with a balance sheet rule that targets public sector net wealth, rather than just debt. Such a wealth target would mean taking proper account of the assets that it acquires and the return that it makes on them.

Indeed, setting annual targets for the change in national wealth would transform government. This would be far more than an arcane accounting change. Government departments and agencies would be forced to pay attention to the assets that they control and use, starting with measuring them properly. They would be incentivised to make sure that they are maintained and used efficiently and deliver the returns that the public wants.

After decades of debt-distracted neglect many countries are now finding that running down assets to pay off debts, often with botched privatisations, has undermined their finances. The notion that ‘budget responsibility’ is enough has been found wanting. Indeed, the UK’s Office for Budget Responsibility (OBR) perhaps ought to be renamed the ‘Office for Fiscal Responsibility’. Better still, perhaps it should be merged with the National Audit Office and renamed the ‘National Wealth Office’.

Annual wealth targets would also dramatically improve the way that government is perceived. Aside from being in tune with Labour’s emphasis on wealth creation, they would set a positive hopeful tone to counter the current gloomy national mood. The government could be recast not as a deadweight on wealth creation of the private sector but rather as another source and facilitator of growth.

This move would also increase the status of public sector workers, helping to attract entrepreneurial talent and generate the potential for higher pay and rewards as the government’s wealth-creating contribution became more visible.

The emphasis on wealth creation might create another virtuous circle. Genuine fiscal sustainability would be well received by the financial markets, lowering the government’s cost of funding. Lower interest costs would in itself give a boost to national wealth over time, and lower the cost of stepping up investment further. Now that would be a Good Thing.

Mark Cliffe is a Visiting Professor at London Institute of Banking and Finance