As John Healey prepares to deliver the Budget this Wednesday, it’s already clear that Labour are looking for ways to keep on borrowing and spending more. Last week, a new report from the Centre for Policy Studies warned that Labour could use a loophole in the fiscal rules created by Rachel Reeves to borrow more off the books – by increasing funding to Public Financial Institutions, known as PuFins.
And, lo and behold, the FT promptly reported that £20 billion more would be allocated in the Budget to the British Business Bank and the National Wealth Fund. The CPS report’s author Tim Dier wrote for CapX about why the Government needs firm fiscal management and budgetary restraint – not an increasing reliance on financial wheezes. It’s my piece of the week. Find out more below.
We also featured Sean Ridley, the energy and environment researcher for the CPS, on why the Government can’t rest on its laurels after approving the Jackdaw field in the North Sea and should now approve drilling in Rosebank as well. James Price also urged the Government to reopen the North Sea and permit fracking to avoid the growing threat of blackouts.
Daniel Herring, Head of Economic and Fiscal Policy for the CPS, looked at the latest International Tax Competitiveness Index, which ranks the UK 30th out of 38 countries. To improve our ranking, he argues the Chancellor should focus on tax simplification, broadening the tax base and removing exemptions. A new wealth tax, by contrast, would push us down to 35th place.
Meanwhile Harry Phibbs analysed whether family firms can survive Labour’s reported plan to close a tax loophole – by almost doubling the tax rate for passing a family business on to your children compared to selling it to a stranger. With three-quarters of SMEs in Britain family-owned, it’s probably not the best idea.
What could be more damaging to the social as well as the economic fabric of the nation than to single out family businesses for punishment? Yet that seems to be the idea
Elsewhere, Nigel Biggar encouraged us all to stand up for our islands’ history and help preserve the valuable traditions and institutions we have inherited. Mel Stride warned that Healey’s Budget will be built on sand, with too little headroom and spending plans that won’t survive contact with reality. And in his latest column, John Penrose argued for getting rid of benefit cut-offs and tax cliff edges for both high and low wage earners.
On The Capitalist this week, CapX’s editor Marc Sidwell sat down with David Frost, who led the UK’s Brexit negotiations and later served as Brexit minister under Boris Johnson. Lord Frost argued that the campaign to keep Brexit’s freedoms needs to start now, and explained why he thinks neither the Conservatives nor Reform UK are yet going far enough, and what it would take to make the Civil Service serve ministers again.
Oscar Gill-Lewis
Deputy Editor, CapX
Labour need to stop using smoke and mirrors accounting
Tim Dier
Imagine borrowing £10,000 from the bank, lending it to a friend, then telling everyone the debt’s gone – because your friend owes you the money.
That’s obviously nonsensical – you still owe the same £10,000 to the bank, regardless of what you did with the money. But that’s Labour’s approach to our public finances. Let me explain how it works.
In his first Budget, John Healey will likely use PuFins to bury even more borrowing, channelling billions into Labour’s pet projects
Public Financial Institutions (PuFin) are publicly-funded bodies that invest taxpayer money via loans, equity investments and guarantees – with the aim of encouraging or ‘crowding in’ private capital, driving policy goals such as green energy or other infrastructure investment.
As I explain in my latest research, prior to 2024, borrowing for PuFins showed up in public sector net debt excluding Bank of England (PSND ex BoE), just as borrowing to build a road would. This handbrake kept the Government honest and meant PuFins were used sparingly.
But in Rachel Reeves’s first Budget, she changed the fiscal rules, from considering PSND ex BoE to considering public sector net financial liabilities (PSNFL).
This meant that the ‘investments’ that PuFins make could largely offset the debt taken on to fund them. Almost like magic, the debt all but disappears from plain sight and barely registers against the fiscal rules.
In fact, had the old PSND target been kept, the October 2024 Budget would have broken the debt rule by £5.8 billion. Under the new PSNFL target, it passed with £15.7bn of headroom. This ultimately allowed the Government to spend more. Needless to say, PuFins have become the Government’s favoured instrument.
Louise Haigh MP, one of Prime Minister Andy Burnham’s principal strategists, doesn’t hide her desire to circumvent the fiscal rules. Writing in Renewal, she argued: ‘we should enable the newly established National Wealth Fund to borrow against their existing balance sheet outside of the fiscal rules.’
The problem is that we’ve been here before. As The Restorationist magazine pointed out, it has all the hallmarks of the Private Finance Initiative (PFI).
Under PFI, accounting treatment kept borrowing off the books, with grave long-term financial consequences for taxpayers. Tony Blair and Gordon Brown, who were responsible for the overwhelming majority of PFI deals, used them to pay for schools, hospitals and other infrastructure worth around £60bn, but taxpayers were handed a bill of nearly £200bn.
The desire to use PFI was driven by accounting smoke and mirrors. History could be repeating itself with PuFins. In his first Budget, Chancellor John Healey will likely use them to bury even more borrowing, channelling billions into Labour’s pet projects.
The state has a poor track record of picking winners at the best of times. With National Wealth Fund capital earmarked for a plethora of projects from green hydrogen through to carbon capture, the taxpayer may never see that money again, let alone any investment return that exceeds the cost of 10-year Government borrowing, which is now over 5.4%.
One case where a PuFin might make sense is financing a fleet of standardised, gigawatt-scale, multi-reactor nuclear power stations. Creditors would recognise the economic value of plentiful energy, and the plants could be sold once operational to pay down the borrowing.
But that’s not what’s happening. The British Business Bank, another PuFin, instead focuses on asking applicants to demonstrate gender and ethnic diversity at all levels of their business, and views organisations with a clear commitment to diversity and inclusion more favourably in its investment decisions. Investment returns on taxpayer money are clearly of secondary importance.
The National Audit Office flagged another risk, warning that overlapping PuFin mandates could concentrate exposure in particular areas, crowding out private investment. Quite an irony, given that one of the arguments in favour of PuFins was that they help mitigate market failure.
The more pressing reality is that this kind of overly complex financial engineering through PuFins does nothing to fool the UK’s highly sophisticated international creditors or bond traders. All it does is demonstrate an increasing determination to deny financial reality and shy away from tough choices – which further undermines the UK’s financial credibility.
What the Government needs now is to demonstrate financial common sense, firm fiscal management and budgetary restraint – not an increasing reliance on financial wheezes such as PuFins, designed to keep clear liabilities away from headline borrowing totals and meet overly flexible fiscal rules.
Hiding debt doesn’t make it disappear – it just encourages massive over-spending, weakening our public finances even more. We need to find ways to balance the budget, cut debt and ensure the state takes up a smaller share of the economy than it does now. It’s time to clip the PuFins’ wings before it’s too late.
And if you want more…
– How Britain lost its energy edge (Sebastian Charleton)
– Why small business has lost faith in Westminster (Robert Colvile)
– I’m on PIP – and I want welfare reform (Luke Murfitt)
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We’ll be back on Monday.
…… continued
right the rules of the game! Yes they have written the rules and still they can’t score! Or win!! Or anything much. Say for scoring own goals of course!!…. Oh and move the goalposts, more times than I can remember and never get booked or sent off unless your Dennis Skinner or Jeffrey Archer of course.
But hey! At least they can still rewrite the rules though! Maybe they can do that?? Maybe John Healy might read these posts here and say …
Spend more money because we need new schools roads and proper armour for our brave men on horses guarding the King.
Or maybe new homes, new schools , oh I’ve said schools, scrub that I mean school playground classrooms, yes new prefabs for our young to freeze in this winter oh yes new energy! Maybe let’s stop all gas so we can be eco friendly and maybe horror if horrors let us all have solar panels air and ground source heat pumps and our own big windmill at every street corner do we don’t have to be at the behest of large companies in France who take our money!?
Maybe he can say, reinstate exchange controls that Thatcher removed in her infinite wisdom. That leads to our money going abroad now! Maybe he can see sense in that?
Or maybe can he know see and finally realise the PENNY has now dropped that, it’s SPENDING that not only gives everyone their money but at the same time it triggers tax take? Maybe he can see that do you think Oscar??
Because if he did see it shouldn’t he start the ball rolling from that Consolidated Fund of his? You know the one he spends from every day you know that one! The one that has a. Open ended free overdraft. The one that goes back to Zero yes ZERO every night after he chooses which billionaire to pay more interest to for lending him our bloody money! You know the money that he the billionaire never SPENDS because, Hey, he doesn’t need to SPEND because the rules don’t make him SPEND it oh no! The system Healy is in charge of you know, the one that he is playing in, because he is player manager in his team the one he not only plays in but manages but runs, and writes the rules, that one he diesent even tax they ubdoent pit if money that is never spent back to us because the billionaire has no incentive to spend because he gets more money from us and Healy for NOT SPENDING it but LENDING it to us and Healy instead!
Yes another unwritten rule that UNSPENT MONEY TRIGGERS NO TAX WHATSOEVER! Or gave I mentioned that already! Sorry in old and can’t always remember!!
maybe Healy can swap all money, cash coin and digital for a digital only currency? To use solely within the uk! That can be tracked traced and made to SPEND with a monthly SPEND by DATE so it ensures money is SPENT making sure we get our money and that money triggers tax!
Maybe he can put a direct debit so any unspent money after a month can be taken and credited to that consolidated fund to give him more money to Spend on us! And maybe as a currency producer he can start to Spend now on what we all need? Maybe we can only need vat to collect sufficient tax to get a surplus. Maybe that tsunami of Spending will give everyone including thot billionaire more stuff to save instead of money!? Maybe golfing gold and houses and shirts to sell later can make them even more wealthy by all that tsunami of spending!
So only one tax from all money moving by SPENDING that gives optimum tax and makes us all happier and wealthier and no borrowing ever and wow! Have I just written a blue print to an actually fully working budget!
If only he was in charge to be able to actually make that sort of decision!??
Excuse my spelling mistakes I’m old and tired and will probably correct them when and if I wake in the morning.
A very interesting article for all
The wrong reasons!
This conjuring trick of PuFin is another example of how NOT to run an economy!
And to ever think cutting SPENDING on a country with crumbling infrastructure and massive debt will ever cure the problem shows not just juvenile ineptitude but gross incompetence!
Can’t politicians realise that we have a four dimensional economy. Money out, money in and money back around all in time to reuse that money flow!?
It’s nit a two dimensional household budget that when you run out of money you keep running straight to the nearest bank or in this case loan shark, to fill the gap your too lazy to earn!!
They just don’t see how tax is triggered! It’s so infuriating.
Tax in fact ALL taxes are triggered not by working. But by SPENDING! Yes, even income taxes are first triggered by the act of SPENDING by the employer on the wages and taxes of the employee.
It’s a subtle nuance. But it’s true. It’s undeniably true. Unarguable!!
It’s not receiving money that triggers tax. It’s prior to that in the chain of events. It’s when money is SPENT.
Yes when money is SPENT leaving the employer it goes straight to HMRC and wages direct to employees.
All taxes are triggered by SPENDING either by choice, need or demand.
Council tax is SPENDING by DEMAND. Vehicle tax is SPENDING by CHOICE of owning a car or not. Vat and Duty are probably by NEED.
In any case regardless of reason we know all tax is triggered by SPENDING because NOT SPENDING triggers NO TAX WHATSOEVER!
I shall say that again. NOT SPENDING triggers no tax! None!!
So it has to be a result of SPENDING. Yes all taxes have to be a result of SPENDING. And once more for the politicians reading this response, ALL TAXES ARE A RESULT OF SPENDING!!
it’s the same unwritten rule of any economy using money tokens in exchange of work for work.
We ALL rely on the SPENDING of others to receive our money! Yes, for us to receive money we have had to rely on the SPENDING of MONEY to actually receive MONEY. Yes, I will say that again for those not listening or those who are politicians not thinking, ….
For us to receive money we RELY ON THE SPENDING of MONEY by OTHERS to receive our money!
Just in case I haven’t said that enough times……
We, as in all of us. Everyone! All of our population. Indeed all politicians, economists, bankers, yes indeed everyone, you Oscar, me, John Healy, Rachel Reeves, Andy Burnham, Kemi Badenock, Nigel Farage, with the exception of thieves who take money illegally but they don’t count in my book because they are thieves EVERYONE in the whole COUNTRY and citizens living or hiding or skiving ABROAD have had to rely on the SPENDING of others to receive their MONEY!
Working alone doesent guarantee money! No tax is triggered until someone somewhere SPENDS it FIRST.
Just like government. Their SPENDING triggers money tokens flow into our economy.
No amount if work triggers tax. It’s the SPENDING that triggers tax NOT WORKING. I’ll say that again just to ram it home! The point that is!!
No amount of work triggers tax none!
And for John Healy … NO AMOUNT OF WORK TRIGGERS TAX. None. NADA if you are a Spanish speaking employee! Or employer!!
So just to recap!
It’s SPENDING that TRIGGERS TAX.
Money only moves by the SPENDING of those HOLDING MONEY (another unwritten rule) ( legally gained money) (although even if it’s stolen money nobody would know at HMRC as they accept all money as long as it’s STERLING and deposited in a bank first). So we must RELY on the system our monetary system, you know the one, the one the government run! The system the government run that, has their skin in the game, because they need our money too, yes the government who are players in the economic system they run, the one they are in charge of, you know the system, the game of economic decisions that makes our whole system work the one that they rule over as player and referee the one they manage you know that one they look after and play in and us of course, never forget us! We are not referee of course nor do we have a manager because they don’t seem to manage our position or don’t they realise we are in the game? Well whatever they are player, referee oh and write the…..