Governments set rules that we, as citizens, must follow – laws with clear consequences for non-compliance. But they also set rules for themselves, and these can be flexible when convenient.
Author
- Chris Parry
Principal Lecturer in Finance, Cardiff Metropolitan University
One such area where rules can change is the government’s approach to national debt and borrowing, known as “fiscal rules”. These are often relaxed in extraordinary times, such as during the 2008 financial crisis and the COVID pandemic. And last week, Chancellor Rachel Reeves a major change to the UK’s fiscal rules. But what exactly are those rules, and how are they changing?
Fiscal rules define the limits on how much the government can borrow, aiming to keep public finances sustainable. These rules have existed in various forms in the UK , with oversight from the Office for Budget Responsibility (OBR) since 2010. The OBR’s job is to examine and report on the sustainability of public finances, with particular attention to two main areas.
First, the deficit, which is how much the government borrows annually to cover the gap between income and spending. And second, the national debt, which is the cumulative amount of all past deficits, currently around .
The chancellor’s new method for measuring debt no longer focuses on the total borrowed but also on the assets it has funded. This is a bit like considering a mortgage relative to the value of the property bought, rather than the amount owed.
The metric, called , will redefine debt as “net financial debt”. Under this rule, debt will be evaluated by comparing it to the assets acquired, with a commitment to see this measure decrease every third year.
But that doesn’t mean the actual debt will continuously go down – it’s just that it will be assessed differently.
What counts as an asset?
The government’s new approach to debt includes certain financial investments as assets, provided they generate returns above the government’s borrowing costs.
One important example of what is now considered an asset is the government’s student loans book. These loans – on which interest is linked to the (a measure that tracks the change in the cost of a fixed basket of goods and services in the UK) – are expected to generate significant returns over decades.
Repayments on student loans begin at different thresholds, with average repayment periods of . A £9,250 student loan taken out in 2013, for example, will peak in value in the 2040s as repayments accumulate.
While the government borrows at relatively low rates, graduates repay their student loans at higher rates. This generates a profit that effectively strengthens the government’s balance sheet under the new fiscal rules.
But there is a moral dilemma here. Students are charged interest on their loans from day one, which compounds like credit card debt. The government doesn’t pay interest in that way on its own borrowings.
The government has also just fresh increases in English tuition fees and maintenance loans from September 2025. So, for the average student, that’s £700 more to pay in the next academic year alone. This adds £2 billion to the government’s student loan book before compounding.
What’s the effect on government borrowing?
The chancellor claims that by focusing on “net financial debt” the government will have greater fiscal headroom, potentially allowing for an additional £100 to £120 billion in spending over the next few years. This borrowing will be managed by the (DMO), an executive agency of HM Treasury, responsible for securing funds for government operations through the sale of government bonds, or “gilts”.
To attract buyers, the DMO needs to offer competitive returns, which may include either fixed-rate or inflation-linked gilts. This comes at a time when other countries are also actively borrowing, meaning the DMO will need to make the UK’s offerings especially attractive. Investors in these gilts will want assurance that the UK is secure and reliable.
What are the risks of borrowing against assets?
The new rules mean the UK’s debt burden will now include assets like student loans, which come with complex valuation methods. The government’s student loan book stood at in the 2022-23 financial year. Not all student loans will be fully repaid, though. And financial markets will scrutinise the stability and reliability of such assets as they weigh the risks and returns on UK debt.
This approach raises questions about long-term sustainability. If markets perceive the UK’s assets – like student loans – as overestimated or unstable, it could undermine the government’s borrowing strategy. Valuing assets based on their future income potential is a standard investment practice, but it’s also fraught with uncertainties.
The UK government is redefining fiscal responsibility by shifting focus from traditional debt measures to a model that includes asset valuations. The goal is to unlock more funds for public spending, but much of this strategy depends on the response from global markets and the effectiveness of the DMO in managing increased borrowing needs.
As the financial markets adjust to these new rules, it will be intriguing to see whether this brave new fiscal framework will succeed in balancing investment with debt or if it will encounter unforeseen challenges.
