Mark Carney: Change the fiscal rules so that the assets of the nation are included

Mark Carney, former governor of Bank of England has given his support to Labour’s proposal that the national debt be recalculated by including assets. He argues that this will stimulate an economy “starved of investment”.

Carney, in his most public support yet of Rachel Reeves’s potential plans to target an increase in “public sector net worth” in her budget for October 30, said that it was “little sense” not to consider the assets of the state when designing fiscal regulations. Carney said that if government money was being spent on building or buying an asset for the nation’s benefit, its value should be included in the definitions of the national debt.

The debate on new fiscal rules has been long overdue. When calculating the debt of the country, it makes no sense to ignore assets, especially when certain initiatives, such as the National Wealth Fund, are designed to achieve what they promise, namely to build national assets.

Carney, the chair of Brookfield Asset Management – one of the largest private investment firms in the world – urged international financiers and businesses to support the change, as long as Labour offered “appropriate transparency” and “rigorous discipline that differentiates productive long term investment from current expenditure”.

The former Bank Governor’s intervention came as the chancellor presented a draft of her first budget to the Office for Budget Responsibility.

Reeves said that she wanted to prioritize capital expenditures such as long-term investments to avoid the “mistakes of the previous Conservative government” which cut state spending to meet fiscal rules. Carney stated that the UK economy had suffered chronically from underinvestment for too long.

The fiscal rule of the government forces the chancellor, in line with the OBR forecasts for the fifth year, to reduce the ratio of public debt to GDP. Labour is looking at an alternative measure – one that aims to increase “public sector net worth”, which includes both debt and assets owned by the state. For example, infrastructure investments made via the new £7.3 billion National Wealth Fund.

According to the Institute for Public Policy Research, switching to a measure of net wealth for public sector would provide Reeves with an additional £59billion in fiscal headroom. This money could be used to fund longer-term investment. Lord O’Neill Gatley is the former chairman at Goldman Sachs. He said that this change in debt could “allow increased investment as well as generate greater fiscal visibility”.

Carney, Reeves’ advisor on the National Wealth Fund said: “UK Budget Rules born of austerity can starve investment in capital when it is most needed. Global investors are looking for a balance between discipline on debt and deficits and ambition for growth and investment.

There are currently several different debt calculation methods being discussed. Each has strengths and weaknesses. Whatever definition is chosen, it is important that long-term investment in infrastructure is appropriately recognised and rewarded rather than being the first budget line cut during tough times.

Carney stated that it was time to “record the value of national assets along with national liabilities, and communicate these values clearly to UK citizens and investors.”

Institute for Fiscal Studies has criticised the change. The International Monetary Fund and Organisation for Economic Co-operation and Development support governments that target net wealth in order to maintain and increase investment. Paul Johnson, the head of this think tank, has warned about the difficulty of accurately valuing assets like roads and infrastructure.