The Green Investment Bank - Environmental Audit Committee Contents

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; 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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