Reeves’ Bold Fiscal Move

Rachel Reeves is reportedly taking inspiration from the European Union as she seeks ways to navigate strict fiscal rules on national debt to increase public spending, according to UK banking expert Bob Lyddon.

Chancellor’s North American Tour

Last week, the Chancellor traveled to North America to present her vision for growth and promote a new National Wealth Fund, backed by £7.3 billion to stimulate further private investment.

Expert’s Concerns

Bob Lyddon, founder of Lyddon Consulting Services, expressed skepticism about Reeves’ approach, suggesting it might involve “creative accounting” to manipulate the books. He stated, “Rachel Reeves wants to spend more. Creating room and quickly requires some rebasing of the definition of the national debt, or ‘creative accounting’.”

Understanding National Debt

Lyddon explained that the UK’s national debt, as measured by the Office for National Statistics (ONS), stood at 99.5% of GDP in June, approximately £2.3 trillion. He highlighted the difference between ‘Public sector net debt’ (PSND) and ‘General government gross debt’ (GGGD), with PSND being £500 billion lower.

Challenges and Comparisons

Lyddon pointed out that reducing debt by netting off publicly-owned assets is ineffective, as their value is negative. He also noted that excluding central bank debts, a tactic used by the EU, complicates the situation further. The UK’s GGGD was £2.8 trillion in June.

Complexities of Bank of England’s Debt

Quantifying the Bank of England’s debt is complex. Lyddon explained that the Bank’s loss of £181.7 billion is being realized through taxpayer payments. Without this loss, the UK’s debt would be 91.6% of GDP, 7.9% lower.

Potential EU-inspired Tactics

Lyddon suggested that Reeves could explore other exclusions from GGGD, similar to the EU’s approach. He identified two specific tactics: excluding debts of public entities outside ‘general government’ and various guarantees or support obligations towards European institutions.

Conclusion

Lyddon warned that the total obligations of EU member states are 160% of GDP, much higher than the 82% figure for GGGD. This approach has allowed the EU to increase its debts significantly, for example, through the £640 billion Coronavirus Recovery Fund and the InvestEU program.