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New UK fiscal metric paints a rosier picture of the national debt

Stephen Beard May 17, 2023
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The U.K.'s new “public sector net worth” measure offsets debt by including government-owned infrastructure, such as railways. Carlos Jasso/AFP via Getty Images

New UK fiscal metric paints a rosier picture of the national debt

Stephen Beard May 17, 2023
Heard on:
The U.K.'s new “public sector net worth” measure offsets debt by including government-owned infrastructure, such as railways. Carlos Jasso/AFP via Getty Images
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The looming debt ceiling deadline in the U.S. has focused international attention on America’s public finances, but there are — needless to say — many other countries grappling with a large amount of public debt as well. For example, the United Kingdom recently saw its public borrowing crash through the symbolically important level of 100% of GDP.

While this ratio is significantly lower than that of the U.S., the U.K. economy is much weaker than America’s, and British deficit hawks fear that their country is drowning in debt. But relief — of the statistical kind, at least — may be at hand. 

The Brits have recently adopted a highly unusual additional new metric called “public sector net worth,” and — hey presto! — it suggests that the U.K.’s public finances are not quite as parlous as they appeared.

“This statistic is a potential replacement for public sector net debt, which is currently the main balance sheet metric that the U.K. government uses to track its public finances,“ explained Martin Wheatcroft, author and consultant for the Institute of Chartered Accountants in England and Wales. “At the end of March, public sector net debt was the equivalent of $3.1 trillion. But the new metric — public sector net worth — showed a deficit of $750 billion, a much smaller number.”  

How did the statisticians achieve this feat and arrive at this rosier view of the public finances? The answer: by offsetting against the debt a whole swathe of publicly-owned assets.

”So that includes the highway network,“ said Wheatcroft. “It includes the railway network, which is government-owned in the U.K., hospitals, schools and other forms of infrastructure. This gives you a much more comprehensive view of the public finances because you’re looking at the wider balance sheet.”   

Many economists also support the introduction of the new metric, which is believed to be the first of its kind in the world. Joshua Ryan-Collins, an economics professor at University College London, claimed that including these assets in any assessment of the public finances makes perfect sense.

“For me, it’s a little bit strange that we would exclude these kinds of assets, which actually make up a huge proportion of the wealth of the state, and only look at the narrower measure,” he said, pointing out that the new metric has not replaced the old one — it is merely an additional statistical tool.

But he concedes that there is a shift in favor of the new approach and the opposition Labour Party, which opinion polls suggest is on course to form the next U.K. government, has expressed interest in looking at the public finances in this way.

Nevertheless, there are some doubts about public sector net worth. Surely, offsetting assets against liabilities only makes sense if those assets can in practice be sold off to pay down the debt. This could, in some cases, prove hugely difficult politically.

“If you sell a road to an operator who has a concession to run a monopoly road, there’ll be a lot of argument over the costs of the tariffs and the charging that takes place,” said Warwick Lightfoot, a former Conservative politician and an expert on fiscal matters, who recently weighed in on the debate about the U.S. debt ceiling.

On the subject of the sale of U.K. state-owned assets, Lightfoot acknowledged that it was a Conservative government that pioneered privatization in the 1980s, but he added that there are many assets included in the new metric that would prove very difficult to sell or to value.

“A school — if you can knock it down and build housing on it — may be worth 200 million pounds. But if its present use is as a school, it’s going to be a lot less than that,” he said.  

But this could, conversely, prove to be a benefit of the new metric, according to professor Ryan-Collins of UCL: It might deter governments from selling off state assets because it would reduce the public sector net worth. Ryan-Collins believes that the wave of privatizations in the 1980s impoverished the country.

“If the state had held on to these assets, it would have been a lot wealthier than it is today,” he said.

There is, however, a fundamental worry about the new metric: a fear that by reducing the appearance of indebtedness, it may entice governments into borrowing a lot more money and that servicing that extra debt could become an unsustainable burden on British taxpayers.

“The danger is that governments might say, ‘The level of debt doesn’t matter. Our liabilities may be expanding but they’re matched by assets.’ That may tempt them to borrow more and acquire more public property,” said Lightfoot. “If those assets don’t yield a financial return to service the debt, governments could be kidding themselves into accumulating more and more debt, which is awkward to manage.”

Lightfoot added that those who advocate the public sector net worth approach have tended to be people who balk at attempts to constrain public spending and government borrowing.

But supporters of the metric insist it will not promote fiscal irresponsibility. British politicians learned a resounding lesson from the shortlived administration of Liz Truss last year, when her government tried to borrow to pay for tax cuts and swiftly came unstuck. Her mini budget caused a meltdown in the bond market and within days she was forced to quit as prime minister.

The bond vigilantes are alive and well and watching the U.K. government’s borrowing and spending like hawks, regardless of the new statistic.

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