6 Impact of the Green Investment Bank
on the deficit
152. So far we have discussed how we would like
the Green Investment Bank to be set up, the need for it to operate
as a 'bank' rather than a 'fund', and the need for good governance
and oversight of its operations. However, we recognise that the
Government's priority is to tackle the deficit and that this may
to some extent curb what might otherwise be desirable in the set
up of the Green Investment Bank. This is because how the Green
Investment Bank is likely to be classified in the National Accounts
will affect the Government's management of its fiscal objectives.
As the Business Secretary told us:
[...] any raising of finance has to operate within
our fiscal constraints, and they are real [...] So there is a
constraint in terms of net national debt, which we have to operate
within.[233]
153. The National Accounts encompasses the presentation
and measurement of the stocks and flows within the economy, including
Public Sector Finance statistics. These statistics relate to the
activity of the public sector including receipts, expenditures,
borrowing and debt, and are used by government when
defining fiscal policy objectives:[234]
- Public Sector Net Debt (PSND)
measures the cumulative indebtedness of the public sector—central
government, local government and public corporations.
- Public Sector Net Borrowing (PSNB)—or 'the
deficit'—is the difference between the public sector's income
and spending in a financial year.[235]
154. BIS set out the importance of Public Sector
Finance statistics within the current fiscal framework and how
that would influence the design of the Green Investment Bank:
Alongside the Fiscal Mandate (to achieve cyclically-adjusted
current balance by the end of the rolling five-year forecast period),
the Chancellor set out in Budget 2010 a supplementary debt target—to
ensure that PSND as a percentage of GDP is falling by 2015-16.
As part of meeting these targets, the Spending Review plans entail
a reduction in total managed expenditure of over £80 billion
in 2014-15. These are factors in considering the classification
of the [Green Investment Bank] and treatment of its functions.[236]
[emphasis added]
155. When the Government establishes a new body,
privatises or nationalises an existing one, or enters into a new
partnership or joint venture with the private sector, the resultant
body must be classified for National Accounts purposes to either
the public or private sector. The body's funding from government
or other sources, and any assets and liabilities from its investments
or operations, will be accounted for according to this classification.
A public sector body will have an impact on Public Sector Finance
statistics, and the Fiscal Mandate; a private one will not.
156. The Office for National Statistics (ONS),
as the independent national statistics body, decides the treatment
in the National Accounts. When deciding, the ONS applies European
System of Accounts standards ('ESA95'), guided by a case history
of previous classification decisions. The House of Commons Scrutiny
Unit provided us with a note detailing some of issues considered
by the ONS when deciding National Accounts treatment.[237]
They pointed out that there are three main criteria the ONS apply:
- Is it a separate institutional
unit—Does it have its own legal form and is it able
to lead a separate existence?
- Which of the five institutional sectors within
the National Accounts should it be classified to (non-financial
corporations, financial corporations, general government, households,
or non-profit institutions serving households);
- Is it a public or private sector institution—Who
exercises control over it?
157. The amount of government control is the
key issue when the ONS makes its decision.[238]
The ONS considers a number of factors, including: the appointment
of directors, who determines corporate policy, the independence
of the Board and sources of funding.[239]
The ONS will weigh all the factors and decide whether overall
they add up to control.[240]
If a body is deemed to be controlled by government (local or central)
or a public corporation, then it will be classified as in the
public sector. If not, then it will be classified as in the private
sector.
158. The attraction of a private sector classification
would be that the Green Investment Bank's operations (its borrowing
and investments) would have no impact on PSND or PSNB, beyond
the Government's initial equity investment. On the other hand,
a public sector Bank's operations would have an impact on PSND
and PSNB:
- Equity investments or loans
made by the Bank would increase PSND because National Accounts
rules regard these as illiquid assets and therefore are not netted-off
against its borrowing from investors when measuring net debt.
- Any payouts to investors as a result of a Green
Investment Bank guarantee would be classified as grants to the
private sector which have to be financed by borrowing, and would
therefore increase PSNB and PSND.[241]
If a public sector Green Investment Bank were to
be given powers to raise its own finance, for example by issuing
bonds, this would be more expensive than if funded by the Government
through gilts sales. If the Bank were in the public sector, it
would be cheaper to fund the Bank directly by the Government itself
raising debt in the capital markets.[242]
159. One area unaffected by the public/private
classification question is the use of the proceeds from the sale
of government assets to capitalise the Bank. BIS told us that
redirecting such sale proceeds would have no impact on PSND or
PSNB:
Sales of government financial assets reduce PSND,
and are PSNB neutral. Since government taking an equity stake
[in] a private sector [Green Investment Bank] would also be a
financial asset, redirecting the funds from asset sales in this
way would have no impact; other than to note a lost opportunity
to pay down debt. Similarly, if the [Green Investment Bank] was
public sector, then the granting of loans or purchase of equity
by the [Green Investment Bank] would be a financial transaction
giving rise to financial assets, so would similarly net off.[243]
160. Financing the Green Investment
Bank using the proceeds from the sale of government assets, regardless
of how the Bank is classified for National Accounts purposes,
will not impact adversely on the public sector finances, other
than a lost opportunity to pay down government debt. We urge the
Government to channel as much of the proceeds from asset sales
as possible into the Bank.
161. A tension exists between any desire for
government control and influence over the Bank on the one hand,
and the aim of minimising the effects of the Bank on the public
sector fiscal position on the other. Greater control will increase
the likelihood of the Bank being classified as in the public sector,
with the Bank having a bigger impact on public sector finances.
Less control will reduce this impact.[244]
Chris Hewett from Green Alliance summed up the dilemma:
Here we come to the heart of the paradox in government
thinking. An off-balance sheet institution being hard to control,
but and on balance sheet one being impossible to afford. The trade-off
politically, is whether the government, and specifically the Treasury,
is willing to give away control of the capital investment it has
made to a new body established under clear statutory rules and
independent governance. If it does not, and wishes to retain control,
then there will be a clear limit on how large the balance sheet
can get. And a [Green Investment Bank] with a small balance sheet
will not be able to make the interventions in the infrastructure
market particularly to make much difference to capital flows.[245]
162. We questioned Ministers as to whether the
Government is seeking advice and clarity from the ONS on the classification
rules, so that these can be properly factored into its consideration
of the pros and cons of the different models for the Bank. No
such proactive approach is being followed.[246]
163. At first sight the situation is complicated
by the UK's more stringent approach to National Accounts classifications
than some other countries. Bob Wigley told us that the impact
of the Green Investment Bank on the public finances appears to
be a particular issue for the UK:
[…] other countries in Europe [...] frankly,
have a less robust and less transparent Government accounting
system; the development banks that exist in most other countries
don't appear in the Government accounts. And in this country,
because we have a more robust and more transparent system, a development
bank's borrowings, for example, would be included in definitions
of public sector net debt.[247]
BIS told us that while all European countries operate
under the European System of Accounts, European development banks
(such as KfW) operate under different national fiscal policies.
Other European Governments focus on the size of 'general government',
rather than the wider public sector debt and borrowing, so the
European development banks' borrowing 'score differently' in terms
of fiscal control.[248]
164. Two years ago, the Government diverged from
its fiscal rules when it excluded the debts of the part-publicly-owned
banks. In the 2008 Pre-Budget Report the Government announced
that it would 'depart temporarily from the fiscal rules until
the global shocks have worked their way through the economy in
full' and that 'while the public sector fiscal aggregates continue
to be affected by interventions in the financial sector the Government
will report on public sector net debt both including and excluding
the impact of those interventions. The Government will base its
fiscal policy, and measurement of its fiscal rules, on aggregates
that exclude that impact'.[249]
165. The Government could now, in theory at least,
exclude the Green Investment Bank's borrowing from PSND, as was
done for Lloyds Banking Group and the Royal Bank of Scotland,
removing the risk that the Green Investment Bank's borrowing would
breach the Fiscal Mandate and allow it to raise the scale of finance
needed. BIS told us that the treatment of Lloyds and RBS debt
was 'justified as a temporary and extraordinary non-discretionary
situation'.[250] Since
Lloyds and RBS were first excluded from PSND figures the Office
for Budget Responsibility (OBR) has been set up to provide independent
scrutiny of the Government's management of the public finances,
and it would remain to be seen whether the OBR would be willing
to accept such a divergence from the essential substance of the
debt position.
166. We are concerned that the
Government is not seeking advice from the ONS about the possible
National Accounts classification consequences of the options for
a Green Investment Bank. The Government should now work proactively
with the ONS to ensure that the Bank can be developed in such
a way as to maximise its impact on investment levels, whilst minimising
its impact on the fiscal position.
167. The Government's primary
policy objective is reducing the deficit. The Government expects
green growth to be a major future driver of the economy—guided
by the National Infrastructure Plan—able to create new jobs
and help transform the UK to a low carbon economy (paragraph
108). The 'step change' that
this requires means that this is an urgent agenda. If it has not
already done so, BIS should raise with the Treasury the scope
for a 'temporary and extraordinary' exclusion of a public sector
Green Investment Bank from the strictures of the Fiscal Mandate.
If, however, the Treasury's deficit reduction strategy prohibits
such adjustment, and the Treasury can only support a Green Investment
Bank that does not sit on the Government balance sheet, then compromises
in the ideal Green Investment Bank set-up may have to be contemplated.
168. We discussed in Part 3 how the Green Investment
Bank might operate and its governance and oversight. We
are not advocating a so closely regulated and supervised body
that it is unable to operate commercially and attract private
sector investors. If close day-to-day control were to put the
Bank on the public sector balance sheet, it would be of limited
value if, as a result, it could only operate as a relatively small
un-leveraged 'fund'. For us, a red-line is that the Green Investment
Bank is a bank, explicitly charged with a specific green investment
purpose and backed by government, that is able to lever in the
large sums needed to deliver the hundreds of billions of pounds
of required green infrastructure.
233 Q 335 Back
234
http://www.statistics.gov.uk/CCI/nugget.asp?ID=55; Ev 143 Back
235
Ev 143 Back
236
Ibid. Back
237
Ev 137 Back
238
HM Treasury, Class (2010)1 Sector Classification, March
2010, pages 9-12. Back
239
Ev 137 Back
240
HM Treasury, Class (2010)1 Sector Classification, March
2010, pages 9-12. Back
241
Ev 143 Back
242
Ev 143 Back
243
Ibid. Back
244
Ibid. Back
245
Ev 127 Back
246
Qq 213, 342, 337 Back
247
Q 66 Back
248
Ev 143 Back
249
HM Treasury, Pre-budget report 2008, Cm 7484, November
2008. Back
250
Ev 143 Back
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