Budget 2024: How fiscal rules are impeding long-term investments – and what Rachel Reeves can do about it
Before we get onto the budget and what Rachel Reeves might do to fiddle her fiscal rules and give herself a little more room to spend, I want you to ponder, for a moment, a recent report from the Office for Budget Responsibility (OBR).
This wasn’t one of those big OBR reports that get lots of attention – such as the documents and numbers it produces alongside each budget, full of the forecasts and analyses on the state of the economy and the public finances.
Instead, it was a chin-scratchy working paper that asked the question: if the government invests in something – say, a road or a railway, or a new school building – how long does it generally take for that investment to come good?
The answer, according to the report, was: actually quite a long time. Imagine the government spends a chunk of money – 1% of national income – on investment this year. In five years’ time that investment will only have created 0.4 per cent of GDP. In other words, in net terms, it’s costed us 0.6% of GDP.
But, and this is the important thing, look a little further off. A high-speed rail network is designed to last decades, and as those decades go on, it gradually improves people’s lives – think of the time saved by each commuter each day – small amounts each day, but they gradually mount up. So while the investment costs money in the short run, in the longer run, the benefits gradually mount.
The OBR’s calculation was that while a 1% of GDP public investment would only deliver 0.4% of GDP in five years, by the time 10 or 12 years had passed, the investment would be responsible for approaching 1% of GDP. In other words, it would have broken even. The money put in at the start would be fully earned back in benefits.
And by the time that investment was 50 years old, it would have delivered a whopping 2.5% of GDP in economic benefits. Future generations would benefit enormously – or so said the OBR’s sums.
Having laid that out, I want you now to ponder the fiscal rules Rachel Reeves is confronted with at this, her first budget. Most pressingly, ponder the so-called debt rule, which insists that the chancellor must have the national debt – well, technically it’s “public sector net debt excluding Bank of England interventions” – falling within five years.
There is, it’s worth underlining at this point, nothing fundamental about this rule. Reeves inherited it from the Conservative Party, who only dreamed it up a few years ago, after COVID. Back before then, there have been countless rules that were supposed to prevent the national debt falling and, frankly, rarely ever succeeded.
But since Reeves wanted everyone to know, ahead of the election, just how serious Labour was about managing the public finances, she decided she would keep those Tory rules. One can understand the politics of this; the economics, less so – then again, I confess I’ve always been a bit sceptical about all these rules.
The upshot is, to meet this rule, she needs the national debt to be falling between the fourth and fifth year of the OBR’s five-year forecast. And according to the last OBR forecasts, which date back to Jeremy Hunt‘s last budget, it is. But not by much: only by £8.9bn. If that number rings a bell, it is because this is the much-vaunted, but not much understood, “headroom” figure a lot of people in Westminster like to drone on about.
Read more from Sky News:
Abolishing national insurance ‘could take several parliaments’
UK has no ‘credible’ plan to fund military equipment
And – if you’re taking these rules very literally, which everyone in Westminster seems to be doing – then the takeaway is that the chancellor really doesn’t have much room left to spend in the coming budget. She only has £8.9bn extra leeway to borrow!
Every spending decision – whether on investment, on the NHS, on benefits or indeed on anything else, happens in the shadow of this terrifying £8.9bn headroom figure. And since the chancellor has already explained, in her “black hole” event earlier this year, that the Conservatives promised a lot of extra spending they hadn’t budgeted for – not, perhaps, the entire £22bn figure she likes to cite but still a fair chunk – then it stands to reason there’s really “no money left”.
Or is there? So far we’ve been taking the fiscal rules quite literally but at this stage it’s worth asking the question: why? First off, there’s nothing gospel about these rules. There’s no tablet of stone that says the national debt needs to be falling in five years’ time.
Second, remember what we learned from that OBR paper. Sometimes investments in things can actually generate more money than they cost. Yet fixating on a debt rule means the money you borrow to fund those investments is always counted as a negative – not a positive. And since the debt rule only looks five years into the future, you only ever see the cost and not the breakeven point.
Third, the debt rule used by this government actually focuses on a measure of the national debt which might not necessarily be the right one. That might sound odd until you realise there are actually quite a few different ways of expressing the scale of UK national debt.
The measure we currently use excludes the Bank of England, which seemed, a few years ago, to be a sensible thing to do. The Bank has been engaged in a policy called quantitative easing which involves buying and selling lots of government debt – which distorts the national debt. Perhaps it’s best to exclude it.
Except that recently those Bank of England interventions have actually been serving to drive up losses for the state. I won’t go into it in depth here for risk of causing a headache, but the upshot is most economists think focusing on a debt measure which is mostly being affected right now not by government decisions but by the central bank reversing a monetary policy exercise seems pretty perverse.
In other words, there’s a very strong argument that instead of focusing on the ex-BoE measure of net debt, the fiscal rules should instead be focusing on the overall measure of net debt. And here’s the thing: when you look at that measure of net debt, lo and behold it’s falling more between year four and five. In other words, there’s considerably more headroom: just under £25bn rather than just under £9bn based on that other Bank-excluding measure of debt.
Keep up with all the latest news from the UK and around the world by following Sky News
Might Reeves declare, at the budget or in the run-up, that it makes far more sense to focus on overall PSND from now on? Quite plausibly. And while in one respect it’s a fiddle, in her defence it’s a fiddle from one silly rule to an ever so slightly less silly rule.
It would also mean she has more room to borrow to invest – if that’s what she chooses to do. But it doesn’t resolve the deeper issue: that both of these measures fixate on the short-term cost of debt without taking into account the long-term benefits of investment – back to that OBR paper.
If Reeves is determined to stick to the, some would say arbitrary, five-year deadline to get debt falling but wants to incorporate some measure of the benefits of investment, she could always choose one of two other measures for this rule.
She could focus on something called “public sector net financial liabilities” or “public sector net worth”. Both of these measures include some of the assets owned by the state as well as its debts – the upshot being that hopefully they reflect a little more of the benefits of investing more money.
The problem with these measures is they are subject to quite a lot of revision when, say, accountants change their opinion about the value of the national road or rail network. So some would argue these measures are prone to more volatility and fiddling than simple net debt.
Even so, these measures would dramatically transform the “headroom” picture. All of a sudden, Reeves would have over £60bn of headroom to play with. More than enough to splurge on loads of investments without breaking her fiscal rule.
There’s one other change to the rule that would probably make more sense than any of the above: changing that five-year deadline to a 10 or even 15-year deadline. At that kind of horizon, a pound spent on a decent investment would suddenly look net positive for the economy rather than a drain.
Whether Reeves wants to do any of the above depends, ultimately, on how she wants to begin her term in office. Does she want to establish herself as a tough, fiscally conservative Chancellor – with a view, perhaps, to relaxing in later years? Or does she feel it’s more important to begin investing early, so some of the potential benefits might be obvious within a decade or so?
Really, there’s nothing in the economics to stop her choosing either path. Certainly not a set of fiscal rules which are riddled with flaws.
Borrowers with a “perfect credit score” and a “few” buy now, pay later transactions have been declined mortgages, brokers have told the Money blog in an exclusive survey.
Several brokers told us a client’s regular use of BNPL services was a factor in their rejection by a high street lender.
Brokers have urged lenders to change the way they judge prospective borrowers with BNPL payments on their credit file.
In response to our findings, two of the biggest BNPL companies hit back, saying they provided innovative services and the rest of the financial industry should catch up.
Find latest tips and deals in the Money blog
What is BNPL – and how do lenders get your usage data?
These schemes allow customers to spread out payments on purchases interest-free and are used by almost 11 million Britons, according to the Financial Conduct Authority.
Klarna, PayPal’s Pay in 3 and Clearpay are three of the most popular in the UK. Here’s how they interact with credit agencies…
Major UK lenders use data from at least one of these credit reference agencies to assess mortgage applicants, along with bank statements and other checks.
None of the BNPL companies perform hard credit checks before allowing a customer to use their services – so that part has no effect on your credit score.
However, payment data is shared, which can have an impact. Missed or late payments can have a negative effect, but BNPL companies say making payments on time can have a positive impact.
But some brokers have seen BNPL payments, whether completed or not, having the opposite effect on mortgage applications.
‘Credit files 150 pages long’
In a survey of 21 brokers commissioned with the Association of Mortgage Intermediaries (AMI), a trade body, 67% of brokers said BNPL had either played a part in or caused a user’s rejection by a high street lender.
Of those, 40% said their client had “regularly” used BNPL, and 21% said they had used it “habitually”.
27% said BNPL use had caused a client to be placed on a higher interest rate.
In one case, a broker told us a borrower had been declined by four high street lenders for using such services a “few times” – despite having a “perfect credit score”.
In another, a client was rejected after a lender identified 33 deferred Klarna payments over a 12-month period.
Some brokers also told us that Klarna payments had left their client with credit files more than 150 pages long.
Jack Tutton, a director at mortgage broker SJ Mortgages, told Money he had a client with 17 active Klarna accounts and more than 100 completed payments who was unable to get a mortgage with a high street lender, and was placed on a higher rate as a result.
His client had built up the Klarna purchases over 18 months, with the amount borrowed as low as £11, even though she had the funds to pay for the products in full.
“All the time people are borrowing money, lenders need to take that into account. I would be very surprised if they ignore those payments because from their perspective they are borrowing money to buy goods as low as like £11,” he said.
“For example, if you’re a first-time buyer, and you’re living at home, then you’re spreading payments of £14 over three months. From a lender’s perspective, that’s going to be a concern.
“My client had one of the longest credit reports I’ve ever seen. And when I spoke to her about it, it was just simply because it was easy to use Klarna.”
He explained that some high street lenders carried out a soft credit check on borrowers, and if the number returned wasn’t high enough, they didn’t get any further in the process.
Read more from the Money blog:
Do you know the wardrobe rule? 11-step guide to buying a house
Veganism in trouble – and the man who sold 500,000 steaks with idea to fix it
‘We’re protecting UK from paralysing attack – and our salaries can be limitless’
But some may ask to see bank statements, so even if a client’s BNPL habit hasn’t had a negative impact on their score, seeing several transactions from their account can raise questions.
“That’s going to open up a can of worms because if they can’t see it on your credit check, and then there are a multitude of transactions on your bank statement, that will need some answering,” he said.
But using BNPL doesn’t mean you will definitely be rejected. If you use it occasionally and sensibly, making payments on time, it shouldn’t have an effect.
One broker reported a mixed picture, with one client rejected but several others using BNPL schemes successfully getting a mortgage from a high street lender.
In total, 53% of the brokers we asked said lenders need to make it easier for people using BNPL to get a mortgage.
David Hollingworth, associate director at L&C, one of the country’s biggest mortgage brokers, said BNPL use shouldn’t be the sole reason a mortgage application is declined, but it could feed into the amount of borrowing available as the lender takes account of the level of commitment.
“Where it’s a very short-term agreement there may be little to no impact but borrowers who are using BNPL very frequently may find lenders taking that into account as a commitment and reducing the level of available borrowing.”
Stephanie Charman, chief executive of the AMI, said: “With consumer use of BNPL rising, it will increasingly come on to firms’ radar, but the benefit of using a mortgage adviser means that consumers are able to discuss their current financial position early on in the process.
“The survey data shows that while some applications are being initially declined, advisers are able to find a solution, giving that only 27% needed to place the customer on a higher rate than initially first researched.”
What do the BNPL companies say?
Klarna argues that having several completed purchases shows good money management, making a person more attractive to lenders.
“If a mortgage broker tells you that using Klarna means you won’t get a mortgage, find a different broker. Lenders have made clear they see healthy, short-term, interest-free BNPL use as a normal part of modern money management – and when used responsibly, it can help, not hinder, your chances of getting a mortgage,” a spokesperson told Money.
To date, Clearpay has never received any queries from customers in relation to it affecting their mortgage prospects.
It told Money that BNPL has become an “everyday payment” for millions of people looking for “innovative financial products”.
It said 95% of transactions are paid on time, with customers using its service to manage their spending responsibly.
“It is concerning that some sectors within the financial services industry may not understand how BNPL works and how consumers are using it to help organise daily expenditure. Clearpay expects lenders to assess BNPL usage in a proportionate manner that is reflective of the risk of the product and the overall financial profile of the customer,” it said.
“We are working hard with credit reference agencies, and the wider industry, to ensure that BNPL data is used fairly in credit decisioning and we support the ongoing work in the sector to drive improvements for customers and firms.”
BNPL is currently unregulated in the UK, but this is due to change in 2026, with Clearpay hoping it will set clear compliance standards for all providers and create a consistent operating environment.
PayPal was contacted for comment on several occasions but did not respond.
What do major banks and lenders say?
Lenders do not have a unified approach to BNPL when it comes to deciding whether to approve a mortgage – so a person who is rejected by one could sail through the process with another.
Money understands that at least one major high street lender does not consider the use of BNPL as part of their approval process at all, viewing the agreements as such short-term loans.
Nationwide captures agreements that have more than six months on them as part of the application process, but it said it saw “very little of this”.
Yorkshire Building Society said occasional BNPL use wasn’t a concern in isolation, but it “may contribute to an overall view if other indicators of financial stress are evident”.
“No decision is made in isolation, and consideration is given to credit card usage and loans – including BNPL – to understand spending habits and repayment history,” it said.
Santander treats pending BNPL payments like an outstanding debt, so while it doesn’t affect customers’ ability to get accepted, it can limit the amount it is able to lend to them.
Leeds Building Society doesn’t treat BNPL any differently to other financial commitments. It is built into its affordability model to make sure a customer’s mortgage is affordable when the BNPL balance is due.
NatWest doesn’t have any specific guidance to BNPL agreements, but does consider them as committed expenditure to make sure a customer’s mortgage is affordable.
Skipton Building Society stressed “responsible management” of all forms of credit, including BNPL, was important when applying for a mortgage.
Coventry Building Society said BNPL shouldn’t do any harm if customers keep up with repayments: “So picking up one or two things on BNPL might not make a great deal of difference, but if it becomes a little more of a habit and those repayments rack up, it could affect your chances of getting a big enough mortgage to buy the property you want.”
It warned, however, that BNPL could be an issue particularly for first-time buyers who were already stretched with mortgage borrowing.
HSBC lends based on the affordability and circumstances of each individual, but encourages applicants to understand their financial commitments before applying.
Already used BNPL? Here’s what you can do to boost your chances of getting your mortgage approved
As we’ve explained, using BNPL isn’t a surefire way to get rejected, but if you’re concerned about your mortgage approval chances, there are some ways to boost them.
Hollingworth said you should check your credit report with the big reference agencies and flag any negative records with your adviser: “If there have been missed payments try to get those up to date and put things back on track as soon as possible. The longer that the track record is clear before making the mortgage application the better.”
Mortgage lenders can view well-conducted credit arrangements positively as it shows that credit can be managed, but it makes sense to review your monthly budgeting.
“If there are outgoings that can be reduced or new credit arrangements that aren’t necessary, then it could help to meet the mortgage lender’s affordability assessment. Again, your mortgage adviser will be able to help you understand what you may be able to borrow,” he added.
Improving your credit score can also improve your chances of being approved and there are some simple ways to do this….
-
Sports2 years agoStory injured on diving stop, exits Red Sox game
-
Sports3 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports2 years agoGame 1 of WS least-watched in recorded history
-
Sports3 years agoButton battles heat exhaustion in NASCAR debut
-
Sports3 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports4 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment2 years agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Environment1 year agoHere are the best electric bikes you can buy at every price level in October 2024