Britain’s Chancellor of the Exchequer Rachel Reeves speaks on stage at the Britain’s Labour Party’s annual conference in Liverpool, on Sept. 23.Phil Noble/Reuters
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
As she tables her first budget next week, Britain’s Chancellor of the Exchequer Rachel Reeves faces an almost impossible order: restoring growth on a tight budget. But she might have a solution that could achieve this goal, and if it works, it could offer tips for Canadian politicians confronting the same dilemma.
Like Canada, Britain suffers from low investment and a misallocation of capital, with an inflated housing market sucking money away from productive activities such as creating new firms or investing in technology. As a result, also like Canada, Britain’s productivity growth has flattened, leading to a falling per capita income. If the U.K. is to restart growth, the government will need to invest more, especially in housing, energy and transportation.
In the run-up to the country’s July election though, the outgoing government laid a trap for Ms. Reeves, making tax-and-spending promises that even its own economists labelled “a work of fiction.” Since they expected to lose the election, they weren’t going to have to keep the promises, and so goaded Ms. Reeves to match them. She took the bait, leaving her with almost no fiscal leeway to meet her other promises – restarting growth and rebuilding public services.
But there may be a way to tweak the budget rules to free up money for investment. One option she is said to be considering is to include the value of the government’s non-financial assets, like railways or public buildings, in the state’s accounts. Including public-sector net worth is akin to the way we regard mortgage debt as different from consumer debt, since it’s backed by an asset.
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There are arguments against doing this. For one thing, the markets for state assets are typically illiquid – there isn’t much private demand for school buildings, for instance, so it’s not clear how they’d be valued. However, the alternative and more conventional approach, of just taking public assets off the government books, equally lends itself to abuse. When governments don’t account for the value of public assets, they often find the temptation of raiding them to cut taxes or spend elsewhere irresistible. They sell off public housing or state companies, or they postpone maintenance on infrastructure and let it degrade, then spend the resulting money.
It would be as if you sold the family silver to fund an overdraft, then said you were living within your means because you’re not running a monthly balance. Few of us would think this is sensible. Yet most western governments have been doing it for decades. In consequence, today the net worth of most of them – the value of assets less debt – is negative.
But the scale of that deficit varies greatly across countries, and one thing Canada has going for it is that it reformed its public pension system in the 1990s. By converting the Canada Pension Plan from a pay-as-you-go scheme to a fully funded one and adjusting contributions accordingly, it was able to take the pension liabilities off the public books. That set the stage for a steady rise in public wealth.
Thus, though we keep hearing that Canada’s public debt is now over 100 per cent of the value of the country’s annual economic output, what’s less well-known is that when you add the value of Canada’s public assets to this account, that figure gets cut in half. So if Britain shows how to boost public investment within a strict budget, Canada would be able to try the same thing from a stronger financial position.
It’s not a contradiction to say the government must both live within its means and spend more on investment. The thing to look for in Wednesday’s budget, therefore, is the scale of capital borrowing Ms. Reeves announces, the way she accounts for it and the reaction of the bond markets. Two years ago, Liz Truss spooked them when her government tabled a budget that borrowed money to cut taxes, on the questionable grounds the tax cuts would spur growth and thus pay for themselves. Investors dumped bonds and sent yields soaring.
But Ms. Truss wasn’t borrowing against an asset but against a future income-stream whose eventual emergence was speculative. If Ms. Reeves, starting from a less favourable position than Canada’s, can pull this off, it would suggest Canadian governments may have room to get more ambitious in their investment plans.
