 to talk about is what's day it should happen on, or who's gonna vote for it, or who isn't. But we are never a follower of fashion in the resolution foundation. Sorry, Richard. So we're not gonna talk about elections, we're gonna talk about fiscal rules instead. But there is a not very tenuous link between the two. The first is that we haven't really got any rules right now, that's what we'll come onto in a second. And that is, our view is a bad idea in general. It is definitely a bad idea as you head into election season. One of the things you find out in elections is they are expensive, as we are definitely about to find out over the next few months. The second is that, slightly more worthily, that rules and fiscal rules, although they are things that fiscal wonks like to talk about, are also quite a good way for understanding what parties are offering. Rather than focusing on the individual bits of policy or the micro, they give you an insight into the strategy of what the government or the prospective government is actually trying to achieve big picture. And so they are useful if you're going into election to have a clear sense of what people are actually going to do. We may or may not get that from the two parties ahead of this election. Now, the task this morning is, first of all, because we're not standing for election, but we do have some fiscal rules to propose. Richard Hughes here, who is a research associate at the Resolution Foundation, previously director of fiscal policy at the Treasury and also done lots of jobs at the IMF and other things is going to set out some of the context to our thinking and then the specific rules we propose. Then we're going to hear from Karen Ward, who is chief market strategist at JP Morgan and was previously the chair of Council of Economic Advisers in the Treasury about what she thinks about fiscal rules. And then we're going to hear from Chris Giles, who is the FT's economics editor since 2004. Since then, we have had five sets of fiscal rules. They have all gone very well. And then we're going to have time for some discussion and questions from the audience. So, Richard. Over to you. Thanks. Thank you, Torsten, and good morning, everybody. This paper is the culmination of a trilogy that we've been working on here in the Resolution Foundation on fiscal rules in the UK. It's also been very much a collaborative effort on the part of the Resolution Foundation's new macroeconomic policy unit. And so, I first wanted to take a moment to thank my co-authors, Jack Leslie, who did all the macroeconomic modeling, underpinning the stress tests that you'll see in the paper. Kara Pachiti, who's the first person in history to ever forecast the UK's public sector balance sheet. And James Smith, who's not only a brilliant macroeconomist but also a really wonderful colleague. Let me start by just setting up the context for this paper. The UK was a pioneer in the development of fiscal rules when we first adopted them back in the late 1990s. Since then, we've had five different fiscal regimes in the last 20 years. They've all included a target for the level of trajectory of debt. And they've also all included a target for some variant of the balance, depending on the economic priorities of the government of the day. The lifespan of these five different rules has ranged from 10 years for Gordon Brown's Golden Rule to less than one year for Gordon Brown's surplus target set in 2015. And the average shelf life of fiscal rules has definitely been declining over time for reasons that we're exploring in a moment. The current set of rules set by Philip Hammond three years ago reached their sell-by date next year in 2021, but have probably already gone off. The Chancellor Bequita's successor, this famous 27 billion pounds in headroom against his 2% of GDP structural borrowing target when he left office after the 2019 spring statement. Unfortunately, a combination of ONS data revisions, a deterioration in the economic and fiscal outlook over the last few months, and a 13 billion pound increase in departmental spending announced as part of the 2019 spending round has probably more than exhausted that headroom against the 2% target and which is now on track to be broken. The new Chancellor has announced an intention to review the fiscal framework ahead of the next budget, and this paper sets out our proposals for what they think that they should be. But before we talk about what rules might make sense today, we thought we should first talk about what lessons we might learn from two decades of experience with fiscal rules both here in the UK, but also in the other 90 countries who operate some kind of rule-based fiscal policy-making framework around the world. And a companion paper entitled Britannia Waves the Rules identifies 20 lessons from the UK and international experience with fiscal rules. You'll be pleased to know I'm only gonna summarize three of those lessons today as they are particularly relevant to the rules which we go on to present as our proposals. The first lesson from experience is what gets excluded, gets exploited in the world of fiscal rules. We've had relatively comprehensive fiscal rules in the UK in terms of institutional coverage. They cover the whole of the public sector, not only central governments, but also local governments and also public corporations, so any companies that local governments or central government owns or controls. They're also fairly comprehensive in terms of the coverage of flows. They cover not just cash, but also accrued revenue and expenditure. But that's been less the case when it comes to stocks which where our fiscal rules have tended to focus almost exclusively on debt, which has encouraged increasingly ingenious and also poor value of money ways of getting liabilities off the government's balance sheet including in the form famously of PFI contracts in the late 2000s and 1990s. And you can see from the chart here that the Labour government's adoption of a target for public sector net debt as one of their fiscal rules back in 1997 fueled a boom in PFI projects over the late 90s and 2000s because the liabilities were not recognized in the measure of debt that the government was targeting. However, once the ONS decided to start classifying these debt-like obligations into public sector net debt starting in 2006, the appeal of this mode of financing fell off rapidly and you can see that reflected in the winding down in the number of PFI projects over the latter half of the first decade of this century. Our second lesson is that rules can be too focused on the past to set the right signals about what fiscal policy should be in the present. And a good example of this was Labour's golden rule set back in 1997 which required the government to balance the current budget over the economic cycle and this was a period which had a certain amount of variable geometry at the time but at the time it was measured toward the end of the period started in 1997 and ended in 2009. And the problem with a rule like this is that it enabled the government to take advantage of current surpluses that they ran in the late 1990s to run increasingly pro-cyclical policy as they moved into the mid to late 2000s. And as you can see from the chart here which plots the fiscal stance measured as a cyclically adjusted primary balance against the output gap, Labour's fiscal policy started out in the right hand quadrant being relatively counter-cyclical but then they took advantage of those surpluses run during that period to actually run increasingly pro-cyclical policy loosening fiscal policy as the economy was running too hot in the late 2000s. And as a result the UK entered the 2008 financial crisis in a much more structurally vulnerable position that had been just aimed to run current surpluses in a given year. But fiscal rules can also be too focused on the future to effectively constrain fiscal policy today. And a good example of this was the coalition government's target to balance the structural current budget over a rolling five and then three year horizon. And as you can see from the purple lines plotted on this chart, the rolling nature of that target allowed the government to repeatedly push back the day of reckoning with each successive forecast from 2013 to 2014 to 2017. And indeed we only actually reached a structural current balance last year. So these kind of mon-yana rules can actually mean that you would never actually reach your intended fiscal objectives. A final lesson of the past is that chancellors consistently underestimate how much of a margin for error they need to build against their fiscal plans if they want to stand a reasonable chance of actually meeting their fiscal rules. And the two charts here show on the left hand side the headroom or degree of overachievement that each chancellor since 2010 has set aside against his fiscal rules when they were first set. And those rules were typically set over a three to five year horizon. And on the right hand side the average forecast error for borrowing in the pre and post OBR era. Now the most amount of headroom that any chancellor has ever set aside against his fiscal targets was 1% of GDP and headroom set aside by Philip Hammond against his 2% of GDP structural balance target back in 2016. And that's between half and a quarter of the amount of headroom which is actually needed to cope with the actual degree of uncertainty involves in trying to forecast the public finances five years ahead even after the creation of the OBR which has helped to improve the credibility of our forecast dramatically. Now in addition to learning lessons from the past in designing the next set of fiscal rules we also need to be cognizant of changes in the macroeconomic environment which will mean that the past will not be exactly like the future. And one of the most commented upon changes these days is the fall in nominal interest rates to historic lows and in some countries even into negative territory. And this poses important challenges from macroeconomic policy as it constrains the ability of monetary policy makers to respond to any future recessions. And it also means that fiscal policy will need to play a much more substantive, active and durable role in stabilizing the economy in the event of future economic downturns. Now the low interest rate environment obviously poses not only challenges but also presents opportunities for fiscal policy not least to tackle the problem highlighted on the right which is the steady decline in productivity growth among advanced economies in recent years. And there was a growing chorus of economists around the world calling on governments to make use of this window of opportunity provided by low interest rates to borrow to invest to kickstart growth across advanced economies. And that brings me on to my third and final change in the macroeconomic environment which is the growing use of public sector balance sheets as an instrument of fiscal policy. This was most evident during the global financial crisis which saw both sides of the UK's public sector balance sheet explode with assets trebling and liabilities more than doubling in the wake of the 2008 crisis as a result of the Treasury's efforts to rescue trouble of financial institutions at the height of the crisis and later by the Bank of England's attempts to rekindle economic growth in its aftermath through its quantitative easing operations. But the use of the government balance sheet has not been limited to these macroeconomic purposes. Over the last decade, the UK has made active use of loans, guarantees and other financial instruments to achieve an array of microeconomic goals including expanding access to higher education helping first-time buyers get a foot on the housing letter and financing major infrastructure projects. And none of these interventions are actually captured by traditional debt measures or borrowing measures that feature in UK fiscal frameworks. So with that as background and motivation, let me come on to the three rules that we propose in our paper. The first rule and the stock anchor in our framework is an objective to increase public sector net worth between now and 2024-25. This has a number of advantages of a public sector net debt which has angered every UK fiscal framework since 1998. It's a more comprehensive measure of the financial sustainability of the public sector. It covers the whole range of the public sectors, two trillion in assets and four trillion pounds worth of liabilities. It captures both sides of the borrow-to-invest equation because rather than excluding investment from the framework, it explicitly recognizes the value and quality of the assets created or acquired through that investment. And it fully and transparently accounts for loans, asset sales, nationalizations and quantitative easing and other sources of what the OBR term fiscal illusions. The second rule and the principle flow objective in our framework is a target to keep the structural current balance within a range of plus one to minus 1% of GDP over a five-year horizon. Now, the advantage of this as a flow target over the current framework is that it would allow government to borrow to invest but require tax revenues to broadly cover the government's day-to-day running costs. The fact that it's cyclically adjusted allows the full operation of the automatic fiscal stabilizers and the 2% of GDP target range is roughly equal to the OBR's five-year forecast error and avoids the disruptive fine-tuning characterized by the bypass point targets which required governments to hit particular numbers in particular years. And by targeting the top end of the range of around 1% of GDP, would help the government to build up policy space to respond to economic downturns and prevent net worth from deteriorating over time as successive recessions hit the UK economy. Our third rule is the requirements keep the share of government revenue spent on debt interest below 10% at all times. And like the debt rules that have featured in UK fiscal frameworks in the past, this rule ensures that any additional borrowing allowed under the two previous rules remain sustainable. But it has a number of advantages over traditional debt-to-GEP ratios. First, it's a better measure of the burden that that debt actually places on the public finances as it takes account not only of the volume of debt but also its cost and the government's ability to service it. And you can see from the chart on the right-hand side that those two things can diverge quite considerably for extended periods of time, including over the past decade, where our level of debt has more than doubled. But actually, the burden that debt interest poses on our public finances has remained broadly the same because of falling interest rates over the same period. Second, it enables policy to gradually adjust to changes in interest rates, debt stocks, inflation, or growth, thanks to the long average maturity of the UK's debt. And finally, it facilitates the coordination of fiscal and monetary policy because it would require fiscal policy to tighten as interest rates rise and vice versa. The final elements in our proposed framework is an escape clause, which suspends the first two rules when there's a negative output gap of more than minus 1% and bank rate is below 1.5... 1.5%. This allows discretionary policy to support economic activity when monetary policy is constrained. And unlike previous escape clauses, which have suspended the whole framework forever, only the net worth and the current balance rules will be suspended, and only in the years for which the output gap would be larger than minus 1%. And the debt interest ceiling would remain in force at all times. So the whole framework doesn't self-destruct when the clause is triggered, as has been the case in previous frameworks, which included these kind of clauses. And moreover, the five-year timeframe for meeting the rules is reset when the output gap closes to below minus 1%, and that allows fiscal policy to return gradually to more neutral settings without undermining the economic recovery. Now, any new set of rules, including our own, is going to have to survive a period of unprecedented economic uncertainty. So the final section of our paper subjects them to a series of stress tests to illustrate their resilience to a range of different kinds of economic shocks. We look at four different scenarios, a baseline scenario based on the OBR's latest economic and fiscal outlook, published back in March, a secular stagnation scenario, which assumes persistent low growth in real GDP and continued low interest rates, a cyclical recession scenario representing a typical demand-led UK recession, and a no-deal Brexit scenario, which assumes that the UK leaves the EU without a withdrawal agreement and combines both the demand and the supply shock. Neither of the government's current rules would survive contact with any of the three stress scenarios, illustrating the need for a framework to build in greater flexibility to cope with a range of potentially economic futures. The government's 2% target is broken by 2021-22 under the three scenarios, and debt rises over the forecast rising in all three of the scenarios, the stress scenarios as well. In our framework, net worth declines under all three of the stress scenarios in the first two years, especially after taking account of any fiscal stimulus packages which are included in the recession and Brexit scenario. So we model not just the impact of the scenario on the public finances, but we also look at what happens if the government puts together a fiscal stimulus package to support the economy through that period and offsets some of the impact on demand. But in both cases, the escape clause is triggered, which resets the clock on these targets and gives the government until 2026-27 to increase net worth from the moment the output gap shrinks below the level that triggers the escape clause. And the modest fiscal consolidation of around 1% of GDP is required beyond the end of the forecast horizon to make sure that net worth returns to being higher than it was five years previously when the shocker debated. And on the right-hand side, you can see that the current balance remains within the target range of plus or minus 1% of GDP and is on track to deliver the current surpluses needed to meet the net worth objective by the end of the new five-year deadline. The debt interest revenue ceiling remains enforced throughout this period and it only gets close to the 10% threshold in the Brexit scenario where increases in RPI inflation imported into the UK as a result of the devaluation and sterling push up the cost of index-lead debt. And on the right-hand side just shows our efforts to stress to the limit that target over a five-year forecast horizon, which would actually require a two-standard deviation shock to both inflation and interest rates or guilt rates to hit 10% for the rule to actually be breached over a five-year forecast horizon. And this is thanks to the long average maturity of UK government debt. However, it's important to bear in mind that it only takes guilt rates at 4%, which is where they were back in 2008, and enough time for this ratio to reach 10% in the fall of the time because the government's got a tax-to-GDP ratio of roughly 40%. So these are our proposed fiscal rules to take us into the next decade and let me conclude by acknowledging that a number of the elements included within it are novel and untested in this or any other country. But at the same time, the UK has long been a pioneer in the design of fiscal rules and the development of leading-age practices in fiscal policy. And if established practices in the design and implementation of fiscal rules were sufficient, we wouldn't be on our fourth set of fiscal rules in five years. So the remaining question to be asked is, is it worth all the effort to get from here to there? And when I look at the fiscal policy debate in the UK and in other countries, I worry less about the costs and risks of adopting a framework like this and worry more about the risks of not doing it. And that's because there is a growing gulf between the way our politicians think, talk about and make fiscal policy and the indicators will be used to actually judge their fiscal performance. With interest rates at historic lows and turning negative in more and more countries, political leaders on both sides of the ideological spectrum in this country are calling for a surge in debt finance investment in physical, human or social capital, which they assert should pay for themselves in the long run. However, our traditional set of fiscal rules rooted in deficits and debt do not provide a basis for judging the credibility of these promises. This is because they only capture one side of the borrowing to invest equation. And this growing gap between stated fiscal aims and measured fiscal reality risks degrading the political salience of fiscal rules on the one hand and allowing politicians to evade fiscal accountability on the other. And so in my view, the marginal administrative costs associated with improving the frequency and quality of balance sheet data and learning how to forecast these aggregates are dwarfed by the benefits of having a more informed discussion of the alternative fiscal strategies currently being posited on both sides of the political spectrum. And given the scale of the UK balance sheet with assets of over 2 trillion pounds and liabilities of over 4 trillion pounds, the modest effort required to get from here to there is almost certainly worth it. And with that, I look forward to the discussion and thank you very much for your attention. Thank you, Richard. Right. Karen, over to you. Okay, well, I'm going to talk less about specifics and more about some general 40,000 thoughts which I thought about much more deeply when I was at the Treasury than I ever had before. I think the first one is, what are the rules for? I suppose when I went into the Treasury, I having had a background purely just being in financial markets, the rules to me were designed to generate credibility to financial investors around the world to demonstrate the government was committed to a sustainable balance sheet, had sensible policies, would not let debt explode or bloat, and therefore it was very much about that signal to the rest of the world. It became very clear that actually there's the secondary very purpose which is actually an internal constraint about how the government manages and never-ending competing demands for cash from different departments and how it places some constraint around the overall envelope in order to decide on those allocations. And I think if we just look at where we are today, that really is the primary function of the rules. Since quantitative easing and central banks desire to fund a higher level of government spending because of their needs to try and get past issues with the zero lower bound and quantitative easing, it really has I think in many ways taken away the financial pressure in the global capital markets that governments may tend to have found themselves under. So I think the rules purpose these days are about what is the political messaging that a government wants to send about its attitude towards debt. And then within that envelope, how is it going to allocate across departments? So I think that's an important element of the consideration of the design is how much does it just merely want to constrain the overall pot. With regards to the best design, exactly as Richard alluded to, I think that the biggest challenge is having something that is rigid and provides a constraint on the envelope such that you can very clearly say, well, there's no money for that project. At the same time has the flexibility such that fiscal policy can be used and can cope with different shocks. And that's very, very difficult to get that balance. I quite like the idea of somehow linking it to some sort of external signal. So whether that's the Bank of England's judgment by where bank rate is, but some escape clause that's not determined internally adds a little bit of credibility to that. But it's very difficult to work out always what those specific escape clauses should look like. And then I think the other major thing, the major challenge is, as you say, whether any type of spending should be exempt. So is there any type of debt that's virtuous, that's valid? And this is where talking about assets, I think where I become a little bit uncomfortable. So the idea, we've often heard when we've been discussing fiscal rules that maybe capital spending should be exempt because as long as you're spending on investment that's going to generate future growth and future tax revenues, that's going to pay for itself. So that's the kind of spending and debt that's okay. That sounds great. That's a very clear, reasonable thing to say. The difficulty is then when you start to put a definition on that capital spending. So is it an infrastructure railway that's going to generate GDP and increased movement of goods and transactions between two cities? Well, maybe that's investment. Is it a teacher's salary where a well-motivated teacher is going to focus on having a really highly educated student that's then going to go out and get a great job and therefore have higher income taxes? Is that investment? It becomes really hard, I think, to actually cleanly categorize what investment is. And that's why I was always very concerned and cynical about excluding something based on capital. And I suppose that's where I'm also a little bit skeptical about the asset value or the balance sheet targeting because I spend my days trying to put a value on assets across various things. And for all the goodwill in the world, if you're trying to do it in the cleanest sense possible, it's very, very tricky. I mean, if the OBR was not overseeing the process, I would say absolutely nowhere in a million years should we be considering it. I think the OBR brings a fantastic contribution in all aspects of our fiscal credibility these days from that external scrutiny and not cooking the books. But even the OBR, with all the best will and not willing to sort of cook those books, can they truly put a value on the UK's assets? It's very, very difficult and bubbles as we've seen in all areas of financial markets. So in real time, often explained away, we often say, if property prices have gone up, well, that's because the UK is suddenly so prosperous. It's a full employment. Those property prices are sustainable because of something that's going on in the economy. We often find a way of justifying the asset value. And it's very difficult in real time, I think, to either lean against the wind of that or to not go with the flow of exuberance about what those asset values are and therefore whether you can spend on the back of it. So I'm a little cynical about that. So I suppose those are some overarching concerns. I think at the end of the day, what are we trying to achieve? I think it is very simple, which is we just don't want debt to be rising forever more into the forecast horizon. I think we want to be considering a longer forecast horizon. I've certainly always been concerned about this fixation with the next one, two, three years when the OBR's fiscal risks report, which then looks further out and really captures some of the pressures that we've got coming from an aging population and how debt, you know, we just look at pat ourself on the back for debt coming down and then that fiscal risk report shows that debt's about to disappear off over 200% of GDP when you factor in those demographic challenges. So how do we take a longer-term look at the fiscal pressures, provide some constraint, provide some limit to that envelope? I think it is really challenging, probably as multifaceted. So I do think having lots of different elements as Richard has put forward. But I'm skeptical about the wealth or the asset value or balance sheet component, I would say. Skepticism's a healthy place to be in life. Thank you very much. Chris, over to you. And you can tell us which is your favourite of the five rules you've watched being bust at the end? Yeah, is it five or is it seventeen? The question is, is it the individual rule or the framework? That's a good question we can have a long debate about down the pub sometime. It's a really good time to be talking about fiscal rules. Both parties are clearly thinking about changing the toys. So Labour implicitly so. They've not actually, I don't think mentioned in public, their fiscal credibility rule from 2017 for over a year. So there's something going on in the Labour Party as well. It's also very big in academia. Certainly I was in Washington at the IMF meetings only a couple of weeks ago, and these sorts of questions are really coming up everywhere. I speak as a bit of a fiscal nerd. I'm sorry about that. I'm sitting here with an IFS pen I've stolen and a budget 2006 red book which is titled A Strong and Strengthening Economy Colon Investing in Britain's Future. So as you can see, nothing changes at all. There's other things in there which are quite interesting I think in the current debate. I'll mention in a bit. I'm also a big supporter of fiscal rules for all the reasons that Richard laid out. I do think they help countries if they have a deficit bias to move towards a more prudent fiscal position and they've helped educate in a very broad sense the public about what are sustainable fiscal objectives in a very broad sense. I also think the value of constrained discretion for governments is rather good both for politicians to make promises they can deliver so they're not promising things they can't deliver and also for the Treasury to constrain spending departments everything Karen just said about what they're actually useful in government I think is entirely correct. It's also, I think we're now just about to move into the 2020s a good time to think hard about sets of fiscal rules and the institutions that govern them because in the 2020s things are going to get quite difficult populations, ageing, taking hold, health, social care and pensions will rise probably spending as two percentage points in GDP or so in the last OBR fiscal sustainability report there's a huge pressure to green the economy to house people and there's no acceptance yet of additional taxation so it's going to be a difficult decade and I think anyone who thinks it won't be is living in cloud cuckoo land. But where I sort of move apart from where Richard, his very good presentation is that I am quite worried about very technocratic fiscal rules which can create a bipartisan consensus and be there forever and ever and ever I'm not worried at all about the number of regimes that have been broken in fact I think that is in some sense the lifeblood of democracy bananas, kippers regulation these things have been used by politicians and in fact one senior politician very extensively to say that external constraints are crushing democracy and it's essentially nonsense but it would be true to say that if we had rules that were incredibly rigid on taxation and public spending that is the lifeblood of democracy and I think we have to worry about constraining it too far at our peril because if the constraints are too great it will be exploited by opportunistic and cynical politicians and instead of people saying it's the EU that stops us our politicians helping you it'll be it's those fiscal rules I can't change that stops us helping you or it's the OBR who are in the room here these fine people who are stopping us helping you that's a bad thing I think for sensible democracy and economic policy making and it's not far fetched you can see it's happening already around the world look at Argentina at the moment for them it's the IMF which is stopping them doing the sensible things for the country and it has kicked out the government just at the weekend or in Italy right at the moment where a very large debate in Italy is about whether the European Commission's the output gap is fair or unfair and that stops them doing what they want to do or in Germany where you have a long and rather silly debate about whether they should move away from black zero or not so I think politicians must be responsible and seem to be responsible for the fiscal rules they create and so my big worry about this report is the sort of central case is slightly flawed because it allows politicians to evade responsibility for the rules they create and I want them to be entirely in charge of that and I would otherwise I think it potentially politicizes the OBR and that the moment that happens it kills the OBR in my view because what is the OBR it isn't really anything other than an honest broker for the forecasts and then marking the homework of the government and providing information on the long term sustainability of the public finances where they're unconstrained where they're constrained in the first one because they're the honest broker about marking the homework against the fiscal rules set by the government and in the second one they're unconstrained about talking about the long term sustainability of the public finances both of those are enshrined in law and actually whoever wrote the law in 2010-11 did that rather well I think so what are fiscals they should be rules of thumb they can be broken if they're broken should I comply with them or explain why not and the OBR should therefore act as an honest broker marking the homework and free to expound on the sustainability of the public finances in the long term and I think that as a framework is where we should be so I'm slightly concerned about going down the slightly more technocratic route but on the specific rules as proposed in this resolution foundation I'd say there's four there's a public sector net worth rule rising there's a targeting a cyclically adjusted current spending budget balance putting that into a surplus five years hence a debt interest less than 10% of tax revenues target and an escape clause linked both to the output gap and interest rates having written something in two columns luckily before a resolution foundation came out with their papers things along the same lines it'd be very childish of me to say that I don't think I think they're in some ways going down the wrong route I think they're entirely in the right area and these are really good report which has a lot of really good thinking in there and a lot of very good evidence about what we should be thinking about just to go through all four and sort of go through them in the order of which I'd like most public sector net worth though is where I'd disagree with Karen that they have assets and liabilities to stop fiscal illusions taking hold it's a very broad concept and it should be there our international performance is very poor on this measure even though the measurement in our country is probably better than elsewhere we have a very bad public sector net worth position essentially through history from prioritizations in the 1980s and large deficits in the 90s and 2000s that's caused our internationally poor position and it'd be very good if we'd been looking at public sector net worth at the time I'm sure some of the decisions taken then would have been thought would have been a bigger in the popular debate about it it's framed very well having a five year target medium term expectations of improvement I think that's entirely the right way of doing it and these sorts of things have worked very well for the one country that has tried it which is New Zealand where it's gone down that route since the mid 1980s in fact and it's had a consistently rising public sector net worth since then the second rule I want to talk about was the interest burden rule so this is to keep your interest payments less than 10% of tax revenue I think again this is a neat rule essentially going down the line of what credit rating agencies already do that's what they tend to use as their measure of fiscal sustainability and it allows lower interest rates it allows you to increase debt if you've got lower interest rates and so it doesn't constrain you in the same way I don't think it's that different to just increasing the public sector net debt a limit from let's say we're around 18 hours to 100 because essentially if you just increase the net debt limit on the basis that interest rates were lower that's essentially doing exactly the same thing so we shouldn't suggest this is entirely different and new and we should be aware of one bit of one one aspect of this which might we might end up regressing were we to go down this route which it would give it give governments an incentive to shorten the maturity of UK debt if we had a positively sloping yield curve and that is something they would want to guard against in that the third rule was the the borrowing rule which is targeting a 1% cyclically adjusted budget surface within 5 years now in truth this is exactly the same rule that Labour followed in the period between 1998 and 2008 for a decade it's the root that Labour actually followed not the rule that was actually written down so if you look at this budget 2006 document they had a cyclically adjusted surface of the current budget going from what they thought at the time was a deficit of 1.3% of GDP to a surplus of 0.8% of GDP so they always and every year said the next time they will move towards a surplus of 3 years hence in that rule and they never made it so it was always on the never never and so there is a deficit bias that's built into this rule it didn't end happily I'm not sure it is a good rule and the second thing I don't like about this rule is the cyclical adjustment element of it we know we have to do that when we put forecasts out but I don't think we should seem to have these in rules because we know they're nonsense and we know there's Robin Brooks at the Institute of International Finance at the moment is running a very fun campaign called a campaign against nonsense output gaps or canoe go and look it up it's really very fun in our world in our very very limited world in this room it is good fun and this was this is also always a problem it's a particular problem in a rule where you have an external body there to assess whether it's met or broken because it puts a huge emphasis on the OBR in our case to actually get the cyclical adjustment quotes right or the European Commission in Italy's case or in Argentina's case the IMF and it can really cause a lot of problems because we know we don't know what output gaps are. For example again back to the budget 2006 what did you think the output gap was in 2006 as far as the Treasury was concerned at the time we now think as Richard put up in his slides economy was running too hot by about 0.3, 0.4% of GDP but the contemporary view was we was running too cold we had 1.5% of GDP we could have had extra growth without creating any inflation or any unsustainability in the economy at the time and that does cause a problem with all of your slides which have the output gap on because you haven't used the contemporary output gap you've used what we now think the output gap was historically that obviously causes a little bit of a problem in the way it would have worked in real time so your escape clause would have been triggered in 2006 you could have done whatever you liked on fiscal policy because we wouldn't have been there so then again so the escape clause again I worry about this escape clause having an output gap component because that would put far too much pressure on the OBR to do an output gap calculation I would very much worry that if what would happen if the output gap was the OBR declared the output gap to be minus 0.9% of GDP so politicians could go around saying it's a disaster we can't help you because these awful people in the OBR have declared completely unreasonably that the output gap is 0.9% of GDP rather than 1% of GDP and therefore that is why we can't increase your benefits or lower your taxes or whatever and if only these people weren't there then we could help you and that is the end of the OBR I think so in conclusion I think fiscal rule should be seen as a rule of thumb they're very important as a rule of thumb they're very helpful the government has to be the people who seem to be setting them not a bunch of technocrats and then has to either comply with them or explain why not there's some very good ideas in this Resolution Foundation document in general but I do have a problem about the deficit bias in the borrowing rule and the cyclical adjustment element and what I want the OBR to be in future is both an honest broker and an information provider and not for people who arbitrate what happens to fiscal policy Great, thank you Chris Let's start off by picking up some of those issues and then let's get to some questions Chris's points and see where we end up some of them are reasonably straightforward so on the current budget rule we're not talking about a rolling target so it's not the same as 2006 it's kind of fixed, you've got to actually hit it in that fifth year or the second year as you get nearer to it so I'm less worried about that but the cyclical adjusted point is a really serious one where you've just got a straight trade off between the degree to which you want what is the truth in so far as I think your phrase was cook the books in so far as somewhere from the Treasury in 2006 in so far as that was what was going on that's obviously what the OBR is for but it's definitely true that having them estimate the output gap does put pressure on the OBR's role although that's also true about their forecast for the economy full stop, that's the basis for meeting the rules but it definitely adds an element of uncertainty where if somebody wanted to politicise the OBR they could point to the gap estimate as particularly uncertain compared to all other bits of the forecast which are all obviously also very uncertain and say that is ridiculous and then do you want to touch on debt interest and whether we actually can whether we end up with lots of stupid things in the system we should just have a high debt target which is definitely where lots of the U.S. debate is just heading to just have high debt, don't worry about a debt interest target yeah I think it's certainly a straightforward thing to measure by comparison with some of the other things which are more new in the world but do exist I think one thing I'd say about debt limits is that we've had quite a bad history with them as soon as you start to approach them so if you reset the debt target to 100 and then you say right we're going to borrow up to 99 which has been what governments tended to do once you get the wrong side of a debt target it basically becomes irrelevant because you've got momentum behind debt growing and it takes 10 years to a decade to get it to come down again I mean just look at this, we've had a successive we tend to promise to get debt falling and it only started doing it two years ago and we had eight years of governments saying we're going to get debt down and it doesn't happen targeting a stock which once it starts going up it tends to keep going up it means it's very difficult to actually use it as a guide for day-to-day policymaking I think this target adjusts more gradually because higher interest rates or debt shocks only filter through to the cost of debt over time and make it more manageable Now on Karen's excellent point which is it's hard enough doing the OBR's job and all this other stuff already do you seriously want the OBR having to calculate the or assess the calculation of the entire asset side of the state? That is a fair question, that is hard people in the OBR are looking sweaty just thinking about it in the audience, Richard defend your ludicrous how are we going to calculate all this stuff? It would certainly be a new challenge for the OBR I mean they already cost lots of other kinds of policies which are quite complicated to understand universal credit being one of them that's gone really well cut but in the end this is fiscal policymaking in practice I think the other thing I'd say is that there are standards and basis for valuing these things similar to the ones used in the private sector so there are independent standards for asset valuation which governments already use to produce their accounts and I guess the third thing is that this is what politicians are promising and so we have to hold them to account for what they're promising and say you promised us a brand new rail system with this value which is going to be bigger than the cost that we're incurring to finance it or we're just going to take them at their word and I'd rather have a system which forces them to actually show that the value of the assets is bigger than their cost of financing than just to assume that exclude the whole thing from the framework and hope for the best. So I completely agree when I think through the micro specific projects as you say it should be if we're thinking about a specific railway city extension having to do that cost benefit analysis on that project makes perfect sense. It's more about the entirety of the balance sheet and then particularly how optimism, exuberance can get built into those estimates of the current stock of physical assets I think that's the real challenge. So building it in a micro manner much as I guess the Treasury does on most of the projects it's evaluating on a daily basis but that I completely buy is the total stock I'm a little more cynical on. Shall we try another critique of ourselves given that and you guys kind of both got at this which is just these are complex. This is like as you say four, we've got four rules you've got to be quite keen to know exactly what they mean now it was always obviously nonsense that the public understood the fiscal rules that was never a thing even though we slightly on occasion early late 90s some economists and policy makers did talk a bit about but you'd have to be a really really weird human being outside of this room to really know what the fiscal rules meant. But maybe this is just like overreaching too it's just so complicated that not even a kind of economists who are kind of following this can follow it so it's not providing any constraint. In the end I don't think it's any more complicated than trying to forecast tax revenue we tend to not get right all the time or forecast spending and again any business has to value its assets and liabilities and produces a balance sheet it's just that government has lagged about a century behind in its accounting practices for kind of first historic reasons that it doesn't do it. I mean we're lucky in the UK that we have people at the ONS some of whom are here today who actually put together this kind of data and not just on an annual basis but actually with the kind of high frequency basis that you can start to use for forecasting and monitoring so I don't think it's as abstract or as academic a proposition as it was five or ten years ago. Today there's been a lot of investment actually put into the production of quite high quality and high frequency balance sheet data which again we're not targeting a specific value for this thing we're just saying it should be going up over time and that also seems to be a kind of intuitive proposition that the net worth of the institution that you're running as chief financial officer should be going up rather than going down. That's a radical idea. Chris, in your kind of day job, if you had a net worth would it make it easier to stop either bad privatisations by bad I mean cheap here rather than whether you think they're selling stuff cheap or bad nationalisations buying stuff too expensive or running it badly or it would still be impossible because no one could measure this stuff. No I think it would make it a lot easier actually. There was literally no traction since 2010 to the hey look student loans all going to be half of them are going to be written off in 30 years time maybe this doesn't solve save as much money to the public finances as we thought until I was at the 2018 OBR fiscal sustainability report which highlighted the fiscal illusions very very clearly and showed there was 10 to 15 billion pounds worth of them. I certainly my day job I had tried to say write a piece on this but there was literally no information so it was impossible and we didn't in the end and frankly it's very hard to get out of the tragedy what the rules were so I think those sorts of issues are much much better where you've got assets and liabilities together and it would be very helpful for a better debate on nationalisation and prioritisation which are going to clearly be part of the life blood of our democracy in the next few weeks even to know that it doesn't cost us 200 billion pounds to nationalise the water industry or whatever the CBI said but it might still be a really dumb idea to do that and then you can actually have a debate about whether it's a good idea or a dumb idea rather than does it cost 200 billion quid. Sounds good. Right let's get some questions and you guys I think there were some mics roving as I hand up here. Anyone else while you move? Charlie Bean LSE and OVR and Chief Outlook Gap Forecaster. I've got a couple of remarks. The first and more minor one is you started by saying that what gets excluded gets exploited which is clearly true but I don't think it's the case that simply moving to a more comprehensive view of the public sector balance sheet solves the problem it just relocates it in how the illiquid assets are valued and that will become the area where there's the jiggery pokery taking place so the question of how you police them or monitor the thing remains important. The more substantive thing relates to the rules themselves now in general I should say I'm very much supportive of the direction in which you've gone. I've always favoured looking at a comprehensive balance sheet. I wrote a paper with William Bowden nearly 40 years ago saying we needed a more comprehensive view and I certainly take the view that the cost-benefit analysis of monetary policy vis-a-vis fiscal policy has shifted in the direction of needing more activist fiscal policy in a world of low natural real interest rates and the rules that you've put forward are obviously designed to make it more possible to use fiscal policy as a councillor's weapon and I think that's the right way to go. But I think it's also important to think how these rules might go wrong and I was quite pleased to see you doing the sort of simulations at the end of different shocks. You have to remember that the rules a good set of rules would be rules that give you room to take the right sorts of councillor's policies and the right into temporal drawing decisions but try and prevent bad behavior, misbehavior and the questions of your rules are going to achieve that. First of all it regards net worth and this is an issue that Karen touched on. The parallel with private businesses is not really right here because there's quite a lot of public sector capital which doesn't generate revenues. Generate social returns but it's not an asset that you can necessarily sell back to the market or something like that. Governments are in danger of conning themselves when they say, boring to invest is all right because they may be building up an asset which if there's financing difficulties can't be sold or anything like that. Then I want to put that together with the debt servicing rule which says when interest rates are low it's fine to borrow lots and as Chris correctly observed that also encourages you to borrow short. Now just think about that for a moment you've got a set of fiscal rules which says hey guys it's fine to borrow lots and lots of short maturity because interest rates are really low and invest it all in assets that are illiquid of very uncertain and dubious returns. Now as somebody who sat through the financial crisis and the Eurozone debt crisis that fills me with horror I have to say. Now this might not be something that's an issue for the next few years but it potentially is a toxic combination. So if you went this way you would certainly need things that require the maturity structure not to be shortened too much but you might want some other things too. Great, thank you Charlie. Anyone else want to come in? Thank you, my name is Moin Islam I'm a fixed income strategist at Barclays. Just a couple of observations which is firstly as to Charlie's point about the term structure I think you kind of sit within the market you're kind of missing the point that the issuance of government debt is not really a function of what the government wants it's what the private sector demands and the term structure of UK debt is really a function of historic private sector pension liabilities not because the government was so wise as to lengthen our debt before the financial crisis. Secondly your 10% and it stems from it this 10% debt interest to a fee rule it's pretty convenient frankly because we have a long term structure and a low debt interest kind of structure so how's that going to change and you're seeing it already in as much that the debt management office is going shorter on the curve if you look at the term structure of guilt forwards relative to swap forwards for example the guilt curve is considerably steeper than the swap curve you talk about fiscal credibility I kind of made this point to you in the past Richard but there are plenty of indicators which suggest that the UK is kind of burning fiscal credibility at a rate of knots already and you kind of assuming within this entire framework that the UK can kind of do what it wants and I would contend that maybe you actually can't do what you want OK great question Let's take those two because they're covering Can I put a question back to that one Put a question back to him Go on then Why is the UK burning through fiscal credibility at a rate of 4.7 You're looking in the wrong place Literally you're looking in the wrong place I would throw that back and say why is the 1030s asset swap box so the relative measure of 30 years spreads versus 10 years spreads at 43 basis points whereas the relative slope of the OIS curve in 1030s is like 13 basis points I'm definitely in detail Great Let's make sure this is comprehensive for everyone in the room So the underlying argument here is a number of things So the first is focusing on the debt interest today as if we're forecasting it today gives you some incentives which we don't like on the term of your debt which is definitely true so in the weeds you would definitely need other things to push against that There's a separate issue which is if things go wrong and your debt servicing costs don't stay low Have you by setting this like 10% target yourself into failure because you can't turn it around quick enough when the pain starts to come through particularly if you've borrowed shorts so that the transformation from market rates changing into the overall cost of your debt is quick which we spent a lot of time in this thinking about One thing I would tell this is in some ways when we've thought about debt rules in the past we've been aiming for these point targets so we've been saying like pre-crisis we're aiming for this 40% and we're going to keep it there it's interesting that you wanted to be at 40 but you're now at 80 it doesn't tell you very much about what you then do here we're really saying 10% is more like an absolute limit if you see yourself going anywhere near it that's the point at which we think society starts to say we're not going to pay that so you'll want to be looking ahead to say am I ever going to get near that which gets towards your question Richard, go on, it's all too loose the country's a basket case rates will soar at some point and then you'll be gone I know, I know it's really early in the morning we're talking about fiscal policies so we're kind of trying to liven it up a bit I guess I'd say two things one is that the incentive to short maturity has always been there because it's always been cheaper at the short end of the yield curve than the long end and despite that fact the UK has consistently lengthened the maturity of its debt so I think that incentive has always been there I'm not sure this framework makes it any stronger or weaker maybe a little bit because it gets you a bit more headroom against one rule where you've already got a lot of headroom so perhaps but I think that's really at the margins and the other thing to say is that what that would do is make your debt interest revenue ratio much more sensitive to changes in the interest rates which if you're even a vaguely enlightened fiscal plan sitting in the Treasury you should be thinking about and conscious of and people do think about these things and the other thing to say is that if there is suddenly a step change in interest rates and they go back up to levels that they were in 2008 well that's an even bigger problem because you have a debt-to-GDP ratio target because you suddenly decided that having 100 or 150 debt-to-GDP ratio is the right number but that's based on interest rates staying at below 1% if they go back up to four that's definitely going to be the wrong number the rule that we've got in here actually makes sure that you take that into account when trying to set fiscal rules and is it too late we've talked about the speed of adjustment the news turns up rates on our four not for our new borrowing on our four getting it around quick enough for our five-year forecast to stop going over 10% and being buffed I mean in practice you're always turning it around over a five-year forecast and actually in practice you're turning it around over 10 years as we've seen with the debt-to-GDP ratio so the speed limit on our pace of adjustment is our political constraints and practical constraints on how quickly you can change policy settings without making whatever economic problems you have worse so I think this is a better reflection of the actual speed at which governments can adjust to make sure this isn't all for Richard is it supportive of net worth as an approach? Charlie's kind of joining in with Karen on the you're going to ask us, you're going to say to people they can buy all this stuff it is either illiquid and so it doesn't really matter what the value is because you can't get rid of it if you're in real trouble or we can't really measure it very well and so are you sure you're not just giving a green light to buying wrong stuff yeah so if you were to borrow short to buy stuff you can't sell a lot of it then that's obviously putting yourself in a difficult position and I totally accept that and so I would suggest that if we are going to increase debt this is why I actually prefer to keep a debt rather than an interest target although loosening it slightly if we are to increase debt to buy stuff you also have rules where governments have to say exactly what they want to achieve and why it increases output and then get the OBR to measure the value of that so you make it a very economic decision and that would mean the additional borrowing which is essentially going down and of course money is fungible I do understand that but it means the additional borrowing is going to be much more on this type of infrastructure and other really clearly economic assets or secondary maybe climate change related infrastructure as well although a lot of that could be done I would have thought in the private sector and of course the other thing is that all of these rules can be gamed and I just remember the debt rule again in the Gordon Brown period where they had two ways of subsidizing the red industry they could either give capital grants to network rail or they could give money actually to the TOCs for the operations and they always went through capital grants because it was easier because of the current budget rule it was much better to structure it in that way and Treaty of Edira was a past master at making sure that things were done in the right way so we always have to be careful and so a big ball walk against that is the second aspect of the OBR's role which is the unconstrained ability to talk about the sustainability of the public finances and even though the fiscal risk reports and the fiscal sustainability reports might not be the most red documents in the country they're very important and they are actually the things where the OBR can highlight problems or highlight aspects of what government might be doing and where it's being a little bit naughty in gaming the rules and do that in an unconstrained way and that is actually a very very effective ball walk I think ultimately and so for example what's happened over the past two years on student loans it wouldn't have happened had it not been highlighted by the OBR anyone's got thoughts? There's two here let's put these two together off you go Andy Thanks so Andy King OBR but this is not an OBR question I just wondered within your three rules how does the Treasury set a spending envelope because the change in PSNW collapses into being a current surplus and then the debt interest one you're miles and miles from the limit so how does the Treasury actually decide what is the maximum on the capital envelope? Great question Francis Francis Coppola financial writer and generally annoying person I really like balance sheets so I'm very glad to see the net worth coming into this because it's annoyed me for years but I have a couple of questions about it the first is that it strikes me as a party of Charlie here we are actually hitting some of the same problems as the private sector hits when it's attempting to assess a very large and really very complex balance sheet and there are two parts of that first is valuation of intangible assets and the framework for doing that I know the OBR has covered this to some extent but it seems to me that if you're actually going to make this part of your fiscal rule setting you've got to be very much more rigorous about it and my second is actually about the boundary of the public sector and I wanted to bring one particular example of this which was the treatment of housing associations which came onto the balance sheet and then were removed from it again and it seems to me there's a little bit of an opportunity there for politicians not politicising the OBR of course to shall we say adjust what is on and off balance sheet to flatter their figures which is of course something we see private sector companies doing but it seems to me we could easily get the public sector doing it too that's a great question Andy's got a really practical question on how do you at the moment for some to a pretty heavy degree your spending envelope can fall out of your fiscal rules on your overall spending whereas our rule makes that easier on current but doesn't do it in a simplistic way on capital it would be quite similar to the way it was done when Labour had a golden rule which is that there was a clear envelope set for current spending which was achieving a current balance over the cycle on the capital side it came down to how much you wanted to invest because there wasn't really a limit on capital spending apart from a debt ceiling which was quite far away I think for the moment that's probably the right calculation for government there are a lot of investment challenges out there which given government the financing environment for government at the moment it should be thinking about whether it wants to meet their interests constraint could well become a constraint in the future if interest rates go up but for the moment there is an opportunity to try and invest in things like getting growth going tackling climate change and these sorts of things so part of the envelope is not so much a question for the Treasury but a question for departments about can you bring forward investment propositions which actually can be demonstrated to improve our net worth over time and help to meet that second objective so the question of the envelope partly comes back to what are the opportunities out there not just what is the constraint on this on Francis's point which is I don't know Chris what you think but so you've covered ad nauseam both the so the classification you're talking about housing associations was an O&S decision but clearly government can set policy to influence the O&S's decision so do you think Chris we don't actually get rid of any of the boundary just becomes the issue rather than the whether you're on the assets and liability side of the I mean if we're talking you know get down to basics the real boundary problem here is that the O&S has a binary is either on or off rather than a mixed function which would be much much better but let's just leave it where we are where the O&S has a binary yes or no actually if you have a balance sheet it makes it I would say a lot less advantageous to get it off balance sheet because you're getting the assets off as well so currently with housing associations or in the big network rail on or off it was that the debt was on but the assets were off and this time it would be you'd be moving both debt and assets off and so it's actually a much smaller decision now and a lot less of an incentive to shift it off than it was before there's a wider point that we should just pick up on the volatility because I think a good critique of this is it's quite hard to measure these balance sheets so when you accidentally get a very volatile thing you're trying to target when things like that happen whereas our view is I mean I think that the traditional thinking on the balance sheet is that it is more volatile than debt because it includes lots of items which are subject to changes in discount rates and other factors when we actually looked at the data it turns out that net worth is less volatile than debt for reasons which once you think about it are also intuitive which is that discount rates affect both assets and liabilities and you get offsetting effects on either side of the balance sheet and it's certainly the case that the incentive to move things off balance sheet are much less when you're losing both the assets and liabilities as opposed to in the past the temptation has always been to get things off because you're just trying to get measured levels of debt down and just on the questions people are raising about valuations it's definitely a challenge within this framework and it's something new which we would have to contend with within our fiscal rules but it is the same set of issues as Francis said that every company grapples with every day when they produce their accounts and there are a whole set of issues there and there's some very good work being done on those intangible assets because for a major private company nowadays in the kind of sort of FTSE 500 these companies have got 50-80% of their value is in the form of intangible assets when you look at government we've only got about 5% of our value measured as intangible assets and that's a sort of artifact of the fact that governments just don't think in balance sheet terms it can't be the case that only 5% of our assets are intangible we've got data, we've got R&D we've got proprietary technology all those things must be worth more than we think they are by actually looking at the balance sheet it actually starts asking interesting questions about what value these things have both for the Republic services but also potentially do they have commercial potential that you can use? You want us to start borrowing against the NHS brand? Well not necessarily Slightly joking but one day we'll get there Karen, come in and wrap up on two other questions I think this is getting me thinking that's what we're here for and although I still am very much against the whole net wealth I'm thinking about this in the current conjecture of where we are with very little monetary ammunition should we face a downturn and increasing use of fiscal balance sheets fiscal policy in order to drive the economy forward particularly in the downturn so I'm thinking about a basic example where we have a horrendous Brexit outcome a key manufacturing sector going through a very difficult time at a sort of government that we need to support an industry through to retain those jobs retain that industry as the economy goes through this difficult time so that would be an acquisition for strategic growth purposes and I think this kind of discussion and this analysis of making sure that the assets are being acquired at appropriate valuations that decisions are being made is absolutely something we need to be having we need to have the framework in place I do think it's on a micro project transparent basis so I sort of just wanted to clarify as my thoughts have evolved that it's not necessarily the aspect I think we should very much be thinking in that way but I'm not sure the conducting a rule around it it's more about the information credibility transparency there's clearly a kind of hybrid of what we're talking about which is stick to your debt rule because people understand it and then have a kind of marginal balance sheet so the things you say you're going to do each year you've got all of the problems about not looking after your assets once you've got them how you run them do then you lose any benefit on those things you can basically publishing your cost benefit analysis of big stuff you do through the balance sheet that would be a good thing to do but you won't get all the wider benefits from a subject to the traumas of doing that. Right let's just wrap up on two issues because we've got five minutes left so the first is to say is climate change we haven't really talked about here but one of the motivations for this is yes we're all talking about big increase in borrowing to invest either for the labour side on nationalisations and on capital spending or in the conservative side basically on infrastructure transport largely but housing presumably at some point as Java gets to announce a budget one day if he does so everyone wants to do it but there's another thing out there which is at some point the state and the private sector is going to have to spend some money on actually getting the country ready for the depressing new world we face do these rules allow us to do that do they allow us to do too much of that is it particularly impossible to measure the value of investments that are climate change focused rather than building a road they certainly facilitate those kind of decisions but I think also encourage government to think in those terms because a lot of the kind of expenditure you need to do to tackle climate change is investment be it in technology research and development all of which counts as assets in the sense that it creates knowledge or in actual physical assets if you're building flood defences that is what you need but I think it also forces you to think on the other side of the balance sheet about potentially what assets are you impairing because of climate change are rising sea levels meaning that your transport infrastructure is more vulnerable these are decisions that corporations are now confronting and having to think about government should be doing the same if we are building infrastructure in flood plains or if we are building infrastructure where they configurationally need to change because of climate change we need to understand what that means for our assets but also we need to think about what new assets we can create to actually help mitigate it and this is a framework which actually allows you to do that Chris I think those are the easy cases a hard case would be changing all of our domestic boilers from gas to electricity because we get nothing for that we could still heat our houses in exactly the same way no improvement in our quality of life but we're not using a fossil fuel assuming the electricity comes in an improvement in our life just in the long term yeah so we're taking whole not sea levels rising potentially lowering future catastrophic risk exactly yeah for a cost now which would be on the balance sheet we couldn't sell at Charlie's point electric boilers in any meaningful way into the market and we probably shouldn't sell the old gas boilers and we shouldn't sell the old gas boilers so that is something which is a big political decision we have to take as a country about something whether we want to incur debt either privately or publicly to do this and that's the decision we have to take regardless of the fiscal rules we have and that is therefore something for politics and not for fiscal rules I'd say but the fiscal rules the fiscal rules mustn't be the thing that prevents us doing that but it's a political decision that decides whether we take it or not okay, Karen, climate change anything on our door? nothing sort of specific your point you just made Chris to me actually is just one of the things I've been mulling over through this whole conversation is ultimately what level of debt do we care about is largely a decision about an intergenerational decision that we're making these days so that final comment that you've just made there on it's a political decision about prioritising the future or at least changing the balance of consideration of future generations to today that absolutely relates to climate change but in my mind actually it's the biggest challenge we have right now in creating fiscal rules is what level of debt is appropriate and that comes down to shifting that intergenerational balance to a more of a concern about the burden that our current generations and our children face rather than today I think it fits very neatly into the overall problem now let's wrap up on because as we started where we started there's probably an election coming who knows maybe not tonight to be called but at some point this week probably what should fiscal policy be doing now in that world and how do these rules relate to that question let's just break that down into like what should be happening on the capital side and what is going on current and the reason that matters is because you're probably going into a election which is different from the previous elections we've had which is one party both party saying we want more spending on public services one saying on top of that we want more capital spending and more tax cuts the Conservative Party and one party saying if they repeat their 2017 approach the other party saying we're going to tax rises to fund our current spending increases so on the current side Labour currently fiscal policy than the Conservatives while saying we want incredibly large increase in capital spending both the nationalised stuff and then also to spread wealth around the country and other things so what should fiscal policy be doing which I think on the capital side the cost of financing is much lower than it was a few years ago and I think the challenges and the need for investment is greater as we learn more about climate change as we continue to experience sluggish growth and the sector is not managing to solve for us I think there is more of a role for government to invest and to take advantage of the environment that we have to try and tackle some of those challenges I think on the capital side the answer is invest more but do so in a transparent way I think on the current side the right answer is keep your powder dry and wait to see what's coming next because I think we are in a period of considerable uncertainty some of which we've created for ourselves but a lot of which has actually been created from a big expansion of current spending or a big cut in taxes or go in the other way would be to be taking a risk in one direction where actually the economy can go in two very different directions Right, Karen You're a tax cutter or tax riser? Well I think we have to somehow increase the horizon of the conversations that we're having factor in that we have an aging population we have very rapidly increasing costs How are we ever going to fix social care and the NHS? How are we ever going to not have a winter where NHS in crisis is not all over rolling BBC news How do we bring that enormous problem that we have in the UK into a true debate about what we can afford and the choices that we face I think that to me is the biggest political challenge that we have you know the spending over the next 30 years there's a lot of predictability on that looking pretty horrific How do we have an honest conversation about the realities of some of the decisions we have to make and unfortunately I think that puts us in a much closer to a tax riser That is definitely a tax riser's answer Chris, you're a tax riser aren't you? I'm definitely a tax right so on capital I think it's you know there's the question of what it is so it's easy on things like housing where there's a financial return and it could actually be probably done in the private sector although quite difficult to do then you've got transport and other infrastructure and then climate change things which I think whatever is going to happen we are going to have more borrowing for capital projects in the next government on the current side I think definitely a tax riser and I would want to run so long as you can for cyclical reasons a tighter current budget then I would want to run a current surplus or current balance in all normal times on the grounds that it's quite an easy fiscal rule to explain to the people that our generation is paying its own way we're willing to borrow to help you in the future but we're not going to borrow for the stuff we're doing today and I think that's a relatively straightforward rule of thumb which if you really hit it or if you don't hit it you explain why not that sounds like good to me there is one just a record on that it would be about the 1990s and all the original fiscal literature about why it was a good idea we may be about to live through the classic case of the deficit bias of a Conservative party having spent nine years getting the deficit down and then deciding that it currently has no fiscal rules at all basically you put it more politely in your slides which is very sensible the truth is the country has no fiscal framework at the moment which is why people are promising stuff all over the shop and that is not a good place to be even if you're not a total fiscal nut can we thank the panel for their thoughts today have a good day as tax payers and spenders because quite a civil servant in the room and remember it's good to know what you owe not just what you borrow to pay for it