Thread by @rjdhughes

1/15. Yesterday's flurry of fiscal policy announcements by the Conservatives & Labour included 2 conceptual revolutions in fiscal rules: net worth targets & debt interest/revenue caps (in blue below)

2/15. Both of these drew inspiration from a recent @resfoundation paper by @jackhleslie, @carapacitti, @JamesSmithRF & me on the next generation of fiscal rules for the UK.

resolutionfoundation.org/publications/t…

3/15. Here is a thread explaining how these new kinds of fiscal rules differ from what has come before and why they make sense for the UK today.

4/15. All five of the UK’s past fiscal rules have used debt as their main stock target, partly because this was the only stock for which we had high quality & high frequency data at the time.

5/15. But the last decade has seen a dramatic improvement in the coverage, quality, and timeliness of information about the government’s wider balance sheet of assets & liabilities. This makes net worth targeting a practical proposition for the first time in the UK.

6/15. Were the UK to adopt a fiscal rule for net worth, it would be one of only three countries (w/ Australia & New Zealand) with a fiscal target covering the whole public sector balance sheet. Most other countries just target borrowing and debt.

7/15. Public sector net worth has been declining in the UK since the early 1980s due a mix of persistent current deficits, privatisations of SoEs, & sales of social housing (it's actually lower than the below chart suggests as this excludes big public service pension liabilities)

8/15. This left the UK with the 2nd weakest public sector net worth position among the 37 countries surveyed by the IMF in their 2018 Fiscal Monitor.

9/15. However, based on the latest data published by @ONS & forecasts published for the first time in our paper, the UK's net worth/GDP is set to steadily improve over the next 5 years, following a decade-long decline post financial crisis.

10/15. Unlike rules for the debt/GDP ratio, targeting net worth/GDP enables the government to take advantage of historically low interest rates to borrow to invest in fixed or financial assets of equal or greater value than the debt incurred.

11/15. But it’s right to keep an eye on the burden that debt places on the public finances, which is why both main parties have adopted a limit on the debt interest/revenue ratio, which, if adopted, would be the 1st rule of its kind at the national level anywhere in the world.

12/15. As @tobynagle points out, the debt interest/revenue ratio is a better measure of how much space governments have to borrow & also helps solve the mystery of why people still lend money to the Japanese government despite their 250% debt/GDP ratio.

13/15. The debt interest/revenue ratio is also a good predictor of sovereign credit ratings, suggesting it is a better proxy for fiscal sustainability and credit-worthiness (as measured by these institutions) than debt/GDP.

14/15. So depending on the general election outcome, the UK could have 1 or 2 new fiscal rules that represent genuine innovations in fiscal policymaking here & around the world.

15/15. After two decades for fiscal rules focused on borrowing & debt, that is nothing short of a fiscal policy revolution.

Read more @resfoundation analysis of Labour & the Conservatives’ new fiscal rules here:
resolutionfoundation.org/publications/r…

@resfoundation *6/15 (incl missing chart). Were the UK to adopt a fiscal rule for net worth, it would be one of only three countries (w/ Australia & New Zealand) with a fiscal target covering the whole public sector balance sheet. Most other countries just target borrowing and debt.

@resfoundation *12/15 (amended chart & right Toby). As @toby_n points out, the debt interest/revenue ratio is a better measure of how much space governments have to borrow & also helps solve the mystery of why people still lend money to the Japanese government despite their 250% debt/GDP ratio.