Stop focusing on the debt, OECD tells Reeves

Rachel Reeves has been given a timely dose of intellectual ballast by one of the world’s leading economic forecasters, which has urged the chancellor to prioritise investment in her maiden budget.
The Organisation for Economic Co-operation and Development, a body made up of the world’s most advanced economies, is calling for more “fiscal consolidation” and belt-tightening for most of its members, but in Britain’s case it says Labour must focus on addressing years of under-investment rather than fixating on its fiscal rules.
“Investment has been sub-par in the past few years and, in order to have stronger growth in the UK, it’s crucial to have more investment,” Alvaro Pereira, the OECD’s chief economist, said after the release of the body’s new forecasts for the world economy.
The organisation has added its voice to the chorus of respected economics bodies that have criticised Reeves’ iron-clad promise to bring the debt down over a rolling five-year period. They warn that it will lead to short-term decision-making and will constrain the government’s ability to borrow to spend in areas such as infrastructure and the green transition.
Public investment in the UK has long fallen below the 38-country OECD average, a factor that will worsen if the rule to bring down the debt ratio and to balance day-to-day spending over five years is maintained, the body has warned.
In stark language, it said Britain’s fiscal targets based on five-year projections “do not allow for public investment to feed through into the supply side of the economy and drive up income. Since investment is treated in the same way as current spending, resources allocated to public investment often end up as the adjustment variable to meet fiscal rules, resulting in inefficiently low levels of productivity-enhancing public investment and significant delays in approved investment projects.”
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If Reeves wants to loosen her target to focus on investment rather than a fall in the debt ratio between year four and year five of her forecast, the OECD recommends that she take cues from the Netherlands, where spending for investment is carved out of day-to-day government spending limits, or Denmark, where fiscal targets are reviewed regularly to make sure that they are not hampering productive spending, the fruits of which usually reveal themselves after a five-year political cycle.
As it stands, Labour says it has inherited spending plans from the last government that imply swingeing austerity in government departments from next year and gross investment levels falling until 2029.
The OECD’s intervention came days after Reeves hinted that she could use the fiscal rules to stimulate, rather than stifle, public investment. She told the Labour Party conference that “growth is the challenge and investment is the solution. It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits, too.”
Later she told business leaders: “We can’t always have ‘no’ for any answer when it comes to infrastructure investment.”
Introducing an explicit carve-out for investment spending, known as a “golden rule”, could be a step too far for a government that has spent the past year saying that it will stabilise the public finances. However, there are other less radical options that may appeal to Reeves, including a decision to switch the debt measure to one that calculates the overall “net worth” of the state.
A public sector net worth measure would include the government’s debts, its liabilities and its assets, such as public lands, buildings and infrastructure. The OECD said that adopting a broader net worth target in the fiscal rule “could strengthen the incentive for governments to focus on investing in high-quality projects. Including a measure such as public sector net worth, that provides a broader measure of public debt sustainability, inclusive of what the government owns and what it owes, as part of a broader range of fiscal metrics could help to better judge the sustainability of debt.”