Posted by Richard Hughes[1]
On 17 July 2018, HM Treasury published its first ever report on Managing Fiscal Risks, the Government’s response to the Office for Budget Responsibility’s (OBR’s) Fiscal Risks Report published in July 2016.
The OBR’s Fiscal Risks Report surveyed the potential near-term shocks to and longer-term pressures on the public finances. It identified 57 different risks emanating from the macroeconomy, financial sector, and government revenue, spending and the balance sheet. It also included an innovative fiscal stress test which looked at the combined impact on the public finances of a range of macroeconomic and specific fiscal risks materialising at once. The Fiscal Risks Report was recognised by the IMF, OECD, and other international organisations as the most comprehensive report of its kind, and the only one produced by an independent body.
Managing Fiscal Risks provides a comprehensive account of the actions the UK Government is taking to address the risks identified by the OBR. In doing so, this report provides a mechanism for Parliament and the public to assess the adequacy of the government’s strategies for managing these risks, and hold it to account for their implementation.
The publication of Managing Fiscal Risks came at a turning point for the public finances in the UK. Having more than doubled since the early 2000s, government debt is forecast to begin to fall as a share of GDP this year from a 50-year high of over 85% of GDP. Supported by the analysis set out by the OBR last year, in particular the fiscal stress test, the Treasury’s response emphasises the dangers of leaving debt at its current levels. While there remains a lively international debate (summarised in Box 2.F of our report) around what constitutes a “safe level of debt,” what is evident from both our own analysis for the UK and the IMF’s latest Fiscal Monitor is that this level is below the prevailing debt/GDP ratios of most advanced economies. Drawing on analysis of the UK’s historical experience of economic and fiscal shocks, present exposure to fiscal risks from a range of sources, and future pressures from an aging society (summarised by the OBR’s latest Fiscal Sustainability Report), Managing Fiscal Risks underscores the need to continue to make progress in reducing the deficit and debt to restore the UK’s fiscal resilience and avoid passing a financial burden onto future generations.
Managing Fiscal Risks also highlights the range of specific steps that the Government has taken to mitigate the risks highlighted by the OBR in their 2016 report. These policy and operational reforms include:
- A new financial framework for the Bank of England which reflects the considerable expansion in the central bank’s remit since the crisis, and ensure that it maintains an adequate level of loss-absorbing capital even in the most stressed environments;
- Reform to financial regulation which reduce both the likelihood and potential fiscal costs of bank failures including through provisions to ‘bail-in’ shareholders and bondholders in the event of future bank failures;
- Measures to adapt the corporate tax system to the rapidly changing digital economy and reduce the cost of tax litigation;
- Action to ensure the pension system keeps pace with rising longevity, including through increases in the state pension age; and
- Reforms to the management of the government balance sheet, including a new regime for controlling and monitoring government guarantees and other contingent liabilities.
The OBR will get an opportunity to assess the impact of these reforms on the Government’s risk exposure when they publish their next Fiscal Risks Report in the summer of 2019.
Taken together, the publication of these two reports—the OBR’s Fiscal Risks Report and HM Treasury’s Managing Fiscal Risks—marks the culmination of several years of work by both institutions to improve the disclosure and management of fiscal risks in the UK. We were both encouraged and assisted in this endeavour by international experts from the IMF and OECD; domestic institutions including the National Audit Office, the Institute for Fiscal Statistics, the Resolution Foundation, and the National Institute for Social Research; and pioneering countries who blazed a trail in this relatively unknown territory including Brazil, Finland, New Zealand, Philippines, and South Africa. We hope the reports will provide some further encouragement and guidance to other countries about the benefits of understanding, disclosing, and addressing risks to their public finances.
[1] Director of Fiscal Policy, HM Treasury, United Kingdom.
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