A fiscal rule change suggested by Rachel Reeves ahead of next week's Autumn Budget, allowing up to £50 billion more investment in infrastructure projects, will look like a most-unappetising bowl of alphabet soup to many people.
The chancellor of the exchequer will reportedly announce the change in the debt rule at the International Monetary Fund's annual meeting in Washington today.
While Reeves is not expected to share her exact plans in the speech, the government plans to assess the UK’s debt position under public sector net financial liabilities (PSNFL) rules.
What is PSNFL?
Using PSNFL – known as "persnuffle" by whimsical economists – rather than public sector net debt (PSND) – allows the government to take into account all the government’s financial assets and liabilities.
One of the big changes by moving to PSNFL is in the way the student loan book is treated (including assuming as an asset a certain amount that will be repaid), rather than the current method of counting the whole loan book as a liability.
A recent description of PSNFL from the Institute for Government is that compared with PSND, it "includes some additional future liabilities that the government has committed itself to, but also nets off more assets where the government would expect a future financial return from previous spending".
"The main additional liability accounted for is funded pension schemes (such as local government schemes), while the assets held by these schemes are also counted on the other side of the balance sheet."
The institute sees the most important other assets included in this measure that are not covered in PSND as being outstanding loans (including student loans) and equity stakes in private companies.
Relative to PSND, the additional assets accounted for are greater than the additional liabilities, so PSNFL is lower than PSND.
What do banks and economists say?
Economists at Barclays noted that PSNFL is a broader measure of the public sector balance sheet than the PSND stance, with the addition of illiquid financial assets and liabilities, such as the student loan book and funded pension liabilities.
This would increase headroom, measured at the fifth year of a five-year forecast, by just over £35 billion, the economists added, circa 1.1% of GDP, and would be on top of the £16 billion increase from the shift from the current measure of PSND that excludes the Bank of England.
The speech from Reeves will be "confirmation of the worst kept secret in public finances", said Panmure Gordon economist Simon French.
"Reeves is front running this at the IMF to avoid any surprises on the Gilt market which has traded differently to other sovereigns since election day so a degree of nervousness," said French.
Reeves' overall stance, he said, was about "reversing some of the planned cuts to public sector net investment should be growth accretive and we expect this to be spent on prisons, roads, hospitals and energy infrastructure - although it will take time to deploy.
"The reason that this additional financial headroom can't be used to avoid tax increases is the second rule – that commits to all resource (non-capital) spending to be funded by general taxation."
Deutsche Bank economist Sanjay Raja said the "issue" with the PSNFL rule, he thinks, "is that it exposes the market to larger tail risk of unfunded borrowing".
And it will need some good explaining from Reeves or backing from more than just the IMF, he suggested, as it "may also be more confusing for investors (and the public), and risks creating more confusion than fiscal clarity – something we think the Chancellor will want to avoid in her first budget".