Britain is trapped in a bizarre economic loop. Every few years, a new Chancellor stands at the dispatch box, adjusts their glasses, and announces a shiny new set of fiscal rules designed to prove they are the most fiscally responsible person in the room. Then, almost like clockwork, the rules are quietly bent, rescheduled, or completely rewritten when real-world economics collides with political reality.
It is a bad habit that has cost the country dearly. We are told these rules exist to reassure international bond markets and keep interest rates down. Yet, the way they are currently designed does the exact opposite. They encourage short-term accounting tricks, starve the country of vital infrastructure investment, and leave the UK poorer. You might also find this connected story insightful: Why Audit Partners Are Mulling Sham Divorces After The Evergrande Collapse.
The debate in Westminster usually splits into two loud, unhelpful camps. One side wants to keep the current rigid rules to maintain credibility. The other wants to rip them up and borrow heavily to fund public services. Both are wrong. Britain does not need to simply loosen its borrowing constraints, nor does it need to cling to a broken status quo. It needs a completely different approach to how we measure economic health.
The trap of the rolling five year target
To understand why British fiscal policy is broken, you have to look at the absurd mechanism at its heart. The headline fiscal rule for years has been that public sector net debt, excluding the Bank of England, must be falling as a percentage of GDP in the fifth year of the official forecast. As highlighted in detailed coverage by Bloomberg, the results are notable.
This sounds sensible on paper. It keeps a lid on runaway debt. In reality, it is a farce.
Because the target is always five years away, it rolls forward every single year. A Chancellor can announce massive spending plans for years one, two, and three, and simply promise that painful spending cuts or tax hikes will kick in during year five to make the math work. When next year comes, that painful year five simply moves one year further into the future.
It is the economic equivalent of starting a diet tomorrow, every single day.
This rolling target encourages governments to play silly games with the national balance sheet. They delay capital projects, sell off public assets at a discount for a quick cash injection, and use highly optimistic growth forecasts from the Office for Budget Responsibility (OBR) to claim they are meeting their targets by the slimmest of margins.
The markets are not stupid. Investors can see through these accounting tricks. Instead of building credibility, this endless game of fiscal hide-and-seek makes British economic policy look unstable and unpredictable.
Why cutting investment is a slow motion economic disaster
The worst side effect of the current fiscal setup is how it treats public investment.
When a government needs to make the debt numbers look good in year five, the easiest thing to cut is capital spending. If you cut day-to-day spending, like NHS doctor salaries or police numbers, voters notice immediately. If you cancel a railway line, delay a green energy project, or postpone building a new laboratory, the pain is not felt for a decade.
So, chancellors consistently sacrifice long-term investment on the altar of short-term fiscal targets.
This is a terrible way to run a country. Britain has suffered from chronically low public and private investment compared to its peers in the G7 for decades.
Average Public Investment as % of GDP (2000–2024)
UK: 2.1%
OECD Average: 3.2%
That gap might not look huge, but when compounded over a quarter of a century, it means crumbling schools, gridlocked transport networks, an outdated energy grid, and sluggish productivity growth. You cannot run a high-wage, high-productivity economy on a low-investment foundation.
Our current rules make no distinction between borrowing to pay for day-to-day government running costs (like civil service salaries) and borrowing to invest in assets that will generate future economic returns (like high-speed internet or new transport hubs). To the fiscal rules, all borrowing is treated as equally bad. This is like a bank treating a homeowner taking out a mortgage to buy an asset the same way they treat someone maxing out a credit card on a lavish holiday. It makes zero financial sense.
Better rules are not looser rules
Let us be clear. The solution is not to go on an unchecked, debt-fueled spending spree. The disastrous mini-budget of autumn 2022 proved that the UK cannot ignore market realities. If bond investors lose faith in the government's ability to manage its finances, they will demand higher yields. That means higher borrowing costs for the government, higher mortgage rates for families, and immediate economic pain.
So, how do we design rules that allow for necessary investment while keeping the bond markets calm?
We have to separate day-to-day spending from capital investment.
A smart fiscal framework should have a strict rule for the current budget. Day-to-day spending must be fully covered by tax revenues over a sensible, fixed timeframe. If you want to spend more on public services or public sector pay, you have to raise taxes to pay for it. No borrowing for consumption.
At the same time, we need a separate capital budget. Borrowing to invest in assets that boost the country’s long-term productive capacity should be permitted, governed by a different set of metrics that assess the quality and return of those investments.
A smarter way to measure national wealth
Instead of focusing solely on gross public debt, the government should start measuring and targeting public sector net worth.
Public sector net worth looks at both sides of the balance sheet. It counts what the government owes (debt), but it also counts what the government owns (buildings, land, transport infrastructure, and financial assets).
If the government borrows £10 billion to build a new transit line, its gross debt goes up by £10 billion. Under the current rules, this is flagged as a negative. But if that transit line is worth £12 billion to the economy and generates long-term tax revenues, the nation's net worth has actually increased. A framework built around net worth would recognize this positive change.
How the Balance Sheet Shifts under Net Worth Targeting:
Borrowing: +£10bn (Liability)
New Infrastructure Asset: +£12bn (Asset)
Net Impact on Public Wealth: +£2bn (Positive)
Focusing on net worth would fundamentally change the incentives for policymakers. It would discourage them from selling off valuable public land or buildings for a short-term cash injection just to meet an arbitrary debt target, because doing so would reduce the state's total assets and leave net worth unchanged or worse.
Some economists worry that valuing public assets is difficult and subjective. How do you put a price tag on a motorway or a public hospital? It is a fair point, but international bodies like the International Monetary Fund (IMF) already advocate for net worth targeting. Other nations have successfully integrated these metrics into their planning. It is far better to have a slightly imperfect measure of real wealth than a perfectly precise measure of the wrong thing.
The path forward for UK fiscal policy
Fixing this mess requires a shift in how we manage treasury rules. If we want to restore genuine credibility and build a growing economy, here is the immediate playbook the government should follow.
- Ditch the rolling five year target: Replace it with a fixed target window. The government should set a target for the end of a parliamentary term and stick to it, rather than letting the goalposts slide forward every autumn.
- Implement a dual budget system: Legislate a strict rule that day-to-day spending must be balanced by taxes within three years, while exempting high-value capital projects from this restriction.
- Empower the OBR to evaluate investment quality: Give the Office for Budget Responsibility the power to assess whether proposed capital investments will genuinely boost long-term GDP. If a project does not meet the criteria, it cannot be funded through the capital debt allowance.
- Adopt public sector net worth as a key metric: Start publishing a comprehensive national balance sheet alongside every budget, making net worth a headline figure that rivals gross debt in importance.
By shifting the focus from short-term debt management to long-term wealth creation, Britain can finally break out of its low-growth, low-investment trap. We do not need to trick the markets with accounting gimmicks. We just need to start investing like a country that plans on having a prosperous future.
