Imagine borrowing £10,000 from the bank, lending it to a friend, then telling everyone the debt’s gone – because your friend owes you the money.
That’s obviously nonsensical – you still owe the same £10,000 to the bank, regardless of what you did with the money. But that’s Labour’s approach to our public finances. Let me explain how it works.
In his first Budget, John Healey will likely use PuFins to bury even more borrowing, channelling billions into Labour’s pet projects
Public Financial Institutions (PuFin) are publicly-funded bodies that invest taxpayer money via loans, equity investments and guarantees – with the aim of encouraging or ‘crowding in’ private capital, driving policy goals such as green energy or other infrastructure investment.
As I explain in my latest research, prior to 2024, borrowing for PuFins showed up in public sector net debt excluding Bank of England (PSND ex BoE), just as borrowing to build a road would. This handbrake kept the Government honest and meant PuFins were used sparingly.
But in Rachel Reeves’s first Budget, she changed the fiscal rules, from considering PSND ex BoE to considering public sector net financial liabilities (PSNFL).
This meant that the ‘investments’ that PuFins make could largely offset the debt taken on to fund them. Almost like magic, the debt all but disappears from plain sight and barely registers against the fiscal rules.
In fact, had the old PSND target been kept, the October 2024 Budget would have broken the debt rule by £5.8 billion. Under the new PSNFL target, it passed with £15.7bn of headroom. This ultimately allowed the Government to spend more. Needless to say, PuFins have become the Government’s favoured instrument.
Louise Haigh MP, one of Prime Minister Andy Burnham’s principal strategists, doesn’t hide her desire to circumvent the fiscal rules. Writing in Renewal, she argued: ‘we should enable the newly established National Wealth Fund to borrow against their existing balance sheet outside of the fiscal rules.’
The problem is that we’ve been here before. As The Restorationist magazine pointed out, it has all the hallmarks of the Private Finance Initiative (PFI).
Under PFI, accounting treatment kept borrowing off the books, with grave long-term financial consequences for taxpayers. Tony Blair and Gordon Brown, who were responsible for the overwhelming majority of PFI deals, used them to pay for schools, hospitals and other infrastructure worth around £60bn, but taxpayers were handed a bill of nearly £200bn.
The desire to use PFI was driven by accounting smoke and mirrors. History could be repeating itself with PuFins. In his first Budget, Chancellor John Healey will likely use them to bury even more borrowing, channelling billions into Labour’s pet projects.
The state has a poor track record of picking winners at the best of times. With National Wealth Fund capital earmarked for a plethora of projects from green hydrogen through to carbon capture, the taxpayer may never see that money again, let alone any investment return that exceeds the cost of 10-year Government borrowing, which is now over 5.4%.
One case where a PuFin might make sense is financing a fleet of standardised, gigawatt-scale, multi-reactor nuclear power stations. Creditors would recognise the economic value of plentiful energy, and the plants could be sold once operational to pay down the borrowing.
But that’s not what’s happening. The British Business Bank, another PuFin, instead focuses on asking applicants to demonstrate gender and ethnic diversity at all levels of their business, and views organisations with a clear commitment to diversity and inclusion more favourably in its investment decisions. Investment returns on taxpayer money are clearly of secondary importance.
The National Audit Office flagged another risk, warning that overlapping PuFin mandates could concentrate exposure in particular areas, crowding out private investment. Quite an irony, given that one of the arguments in favour of PuFins was that they help mitigate market failure.
The more pressing reality is that this kind of overly complex financial engineering through PuFins does nothing to fool the UK’s highly sophisticated international creditors or bond traders. All it does is demonstrate an increasing determination to deny financial reality and shy away from tough choices – which further undermines the UK’s financial credibility.
What the Government needs now is to demonstrate financial common sense, firm fiscal management and budgetary restraint – not an increasing reliance on financial wheezes such as PuFins, designed to keep clear liabilities away from headline borrowing totals and meet overly flexible fiscal rules.
Hiding debt doesn’t make it disappear – it just encourages massive over-spending, weakening our public finances even more. We need to find ways to balance the budget, cut debt and ensure the state takes up a smaller share of the economy than it does now. It’s time to clip the PuFins’ wings before it’s too late.
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