By Bob Lyddon – 4 minute read

LABOUR’S new ‘iron’ fiscal rules will open the floodgates to ‘borrowing for investment’, under the Government’s new measure of the national debt, called ‘Public sector net liabilities’.

That is the message of my paper ‘ ‘Borrowing for investment’ – what is meant by this statement in theoretical terms’ published by Global Britain today and is at the foot of this blog.

This means firstly that, as long as any borrowings are spent on public assets, the assets can be netted off against the borrowings that enabled their construction. ‘Public sector net liabilities’ will seemingly remain stable even where huge amounts of new debt are added. 

Secondly, the nation’s Gross Domestic Product (GDP) will rise as the debt is spent on the new assets. There is a short-term ‘sugar rush’ of GDP growth. The ratio of Debt-to-GDP will fall, as long as creditors, investors and public credit rating agencies are gulled into looking at ‘Public sector net liabilities’, and not at ‘Public sector net debt’.

Thirdly, it means that the government will mobilise schemes structured exactly like New Labour’s ‘Private Finance Initiative’ (PFI) and the EU’s InvestEU programme: debt-funded schemes aimed at the Net Zero transition, with the costs being funnelled through to businesses and individuals in a number of ways, adding up to a major rise in the cost of living.

Within these schemes the public sector acts as the taker of the highest risk and the receiver of the lowest return. This is because the private sector will not finance it.

The public sector both takes on the high risk/low return amount in the scheme’s financing itself, at the same time as causing the scheme to take on external debt from lenders and investors of fifteen to twenty times the amount. The public sector strikes a contract with the scheme that makes businesses and individuals responsible for the scheme’s debt service, just as they were under PFI for new schools, hospitals and university buildings constructed in Labour areas.

The credit risk for lenders and investors is substantially the same as if they bought a government bond. Notwithstanding the low credit risk, the return for investors is 5 per cent higher: that is the premium required by investors for enabling the government’s accounting trickery.

High returns for investors mean a high debt service cost for the scheme, which can only translate into a high cost of the scheme’s product for its users: it is foisted on businesses and individuals who cannot shop elsewhere, and for a long period. 

This creates a medium-term ‘hangover’ for the economy to follow the short-term ‘sugar rush’ of GDP growth, as the schemes deliver no pull-through of wealth creation, and their excessive cost diverts resources away from productive spending and investment. Instead the economy is lumbered with a mixture of higher taxes and usage charges needed to pay the scheme enough to meet its debt service costs.

This is what is already happening to the EU with InvestEU having now existed for ten years. It has been happening to the UK for some time under PFI: £50 billion in capital cost was spent by New Labour 1997-2010, but the total bill including financing costs is projected to be £278 billion up until 2052-53. That is a ratio of £5.56 of total cost for every £1 of building cost.

On top of acting as a running sore on businesses and individuals, the schemes divert money away from genuinely entrepreneurial opportunities, since a 5 per cent premium over a government bond for the same credit risk has the effect of hoovering-up money into these schemes and away from others.

Genuine entrepreneurialism, risk-taking and high returns all dwindle, and the economy begins to stagnate, trends that are becoming visible in the EU economy.

That is the present for UK businesses and individuals wrapped up within this Labour Government’s tantalizing promise of boosting borrowing for investment.

Bob Lyddon is an independent financial analyst specialising in international and central banking.

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FULL PAPER

‘Borrowing for investment’ – Labour aims to engage in an orgy of borrowing but off-the-books, just like New Labour’s ‘Private Finance Initiative’

21 May 2025

Introduction

THIS IS A SUMMARY of the third of four papers on the UK’s public finances, written in the first quarter of 2025, published through Global Britain and entitled ‘‘Borrowing for investment’ – what is meant by this statement in theoretical terms’.

This one outlines the theoretical basis of part of the Labour Government’s new ‘iron’ fiscal rules, namely the part about borrowing for investment. By 2029 this should be the only part of the government’s budget which requires borrowing, and the new borrowing will be governed by the government’s new measure of the national debt, called ‘Public sector net liabilities’.

Given what has been revealed so far, the UK can expect a repeat of New Labour’s ‘Private Finance Initiative’ of 1997-2010, mixed with the EU’s InvestEU programme: financing the Net Zero transition through debt-funded schemes, with the costs being funnelled through to businesses and individuals in a number of ways, adding up to a major rise in the cost of living.

Borrowing-for-investment

Labour’s new ‘iron’ fiscal rule is to limit borrowing to that which is taken up for ‘investment’. This means that there should be no borrowing to meet the government’s day-to-day costs by 2029, an objective from which the UK is constantly diverging, and which the Office for Budget Responsibility has only endorsed because Labour has convinced it that, by 2029, Labour’s borrowing-for-investment will be triggering higher economic growth and tax revenues.

In one sense borrowing-for-investment will automatically trigger higher economic growth: the funds so borrowed are spent on goods and services, which count towards economic growth.

The traditional yardstick was that such investment ought to produce useful assets which then contribute to economic growth and tax revenues. Labour’s plans see the spending of the money as the end in itself, unless one believes that Net Zero will unlock prosperity.

Public sector net liabilities

The accounting trick is to borrow-and-spend in such a way that the spending increases economic growth but the borrowing does not increase the national debt. In that way the economy’s size (GDP or Gross Domestic Product) goes up, national debt does not, and so the nation’s Debt-to-GDP ratio falls.

The Labour Government’s new measure of national debt will achieve precisely that – ‘Public sector net liabilities’ instead of ‘Public sector net debt’. All debts are captured in ‘Public sector net debt’. Under ‘Public sector net liabilities’ the assets bought with the debt are netted off. It is a formula for adding of unlimited amounts of new debt as long as the debt is spent on assets.

‘Public sector net liabilities’ will remain stable even where huge amounts of new debt are added. The nation’s GDP will rise as the debt is spent on the new assets. The ratio of Debt-to-GDP will fall, as long as creditors, investors and public credit rating agencies are gulled into looking at ‘Public sector net liabilities’, and not at ‘Public sector net debt’.

Legitimisation for government involvement and the basics of how

The schemes that enable this accounting trickery are of marginal attraction financially, but they meet the government’s public policy objectives. Net Zero schemes tick this box. This justifies the government acting within the scheme in the role that the private sector – the so-called ‘missing investor’ – refuses to take, because it involves too much risk for too low a return.

The government – acting in the name of the public – takes on the high risk/low return role in the scheme. The scheme then borrows a large amount of money on top, the cost of which is much higher than the government borrowing itself.

If the annual cost of government debt is 5 per cent, the cost of debt inserted into these schemes will be 10 per cent – a 5 per cent premium for investors’ enabling of the government’s accounting trickery.

The scheme makes the general public, one way or another, responsible for paying in the amounts of money that enable the scheme’s debt service – payment of the inflated interest rate and repayment of the scheme’s borrowings.

The general public will be at the back of the queue when it comes to benefitting from these high returns, but at the front of the queue when it comes to enabling them for others.

InvestEU

The EU has its scheme called InvestEU which works exactly on the principles outlined above. The risk-taking is done by the European Investment Bank Group, acting at the behest of the EU and of its shareholders, who are the EU member states.

The European Investment Bank itself and its subsidiary the European Investment Fund either provide or support the high risk/low return levels of financing in InvestEU schemes, which then borrow fifteen or twenty times the amount and build an asset, whose product – usually expensive green energy – EU businesses and individuals are compelled to buy.

The imperative is that the schemes’ debts do not figure in the measure of member state debt published by Eurostat, called ‘General government gross debt’.

Leverage and where lenders’ credit risk lies

The amount of money for which the public are supposedly at risk in such a scheme might be as little as 5-10 per cent of the whole: the high risk/low return portion of the scheme’s financing.

Actually they are at risk for all of it, because the same persons – EU businesses and individuals – are compelled to buy the scheme’s product as would lose out if the 5-10 per cent high risk/low return portion were not paid back.

The scheme structure enables investors and lenders to ‘look through’ to EU businesses and individuals as their source of repayment and classify what they hold as ‘EU public sector risk’,  the same credit risk as if they bought a bond issued by an EU member state that did count within ‘General government gross debt’.

Lack of a genuine entrepreneur in InvestEU schemes

There is no genuine entrepreneur in this scheme. A financier may actually provide the cash into the high risk/low return layer, but under the guarantee of the European Investment Fund or with an option to sell shares to the European Investment Fund at a guaranteed price.

The schemes are an example of state direction of the economy – money flowing into the sectors which represent a public policy priority as defined by the government.

This is not to say that no-one makes money out of the schemes: the financiers into the other layers make money, receiving their 5 per cent premium over what they would earn for investing in a bond issued by an EU member state that did count within ‘General government gross debt’.

The UK’s Private Finance Initiative (PFI)

InvestEU is a replica of the UK’s PFI scheme, beloved of New Labour for making new schools, hospitals, and university buildings pop up in Labour areas. £50 billion in capital cost was spent, with a total bill including financing costs of £278 billion up until 2052-3. £133 billion remains to be paid, equivalent to an addition now to the national debt of £97 billion.

A ratio of £5.56 of total cost for £1 of building cost was the premium for the accounting trickery desired by New Labour: to make all those shiny new assets appear in Labour areas, without a commensurate addition to the national debt, and making the cost be borne as general taxation by the entire country, rather than as council tax or usage charges paid by Labour Party voters in the areas where the assets appeared.

Overall impact on an economy

An economy based on these principles experiences a ‘sugar rush’ of economic growth – and of inflation – as the debt is borrowed and then spent by these schemes. This is followed by a lengthy headache, as the schemes deliver cost but no pull-through of wealth creation.

The schemes deliver incremental cost in the medium term, which diverts resources away from spending and investment, thanks to the necessary higher taxes or to the high charges experienced by businesses and individuals for using the scheme’s asset or service.

The schemes divert money away from genuinely entrepreneurial opportunities, since a 5 per cent premium over a government bond for the same credit risk has the effect of hoovering money up into these schemes and away from others.

Genuine entrepreneurialism, risk-taking and high returns all dwindle, and the economy begins to stagnate. InvestEU having now existed for ten years, these trends are becoming visible in the EU economy.

Conclusion

Labour’s borrowing-for-investment contains the potential for much higher borrowing and related cost, without genuine economic benefit.

The measure of national debt that is ‘Public sector net liabilities’ will conceal the volume of extra borrowing, whilst inflicting its cost in the medium and long term on businesses and individual alike.

The EU already has such a model – InvestEU – and its main role is the financing of the transition to Net Zero, as Labour’s ‘borrowing-for-investment’ is likely to be. The EU’s stagnating economy is the model for what the UK’s economy will look like five to ten years down the line.

Bob Lyddon is an independent financial analyst specialising in international and central banking.