How Reeves has found an additional £50bn a year to borrow

Rachel Reeves at the Stanford Training Area near Thetford on October 20. Credit: PA

By targetting the "snuffle," Rachel Reeves is creating "headroom" to borrow an additional £50bn to £60bn every year - which is more than the unfunded borrowing that spooked investors in Liz Truss's mini-budget and led to a fiscal crisis.So, whether the chancellor is being sensible or reckless by changing the debt target in next week's budget, will be decided by the "guard rails" or constraints she puts in place.I assume the reaction of many of you is "You what?"So this is why the snuffle matters.

It is about whether Reeves is creating space for the government to borrow to fund productive investment, that will boost economic growth which makes us richer.

Or whether she is recklessly robbing Peter to pay Paul, at a time when the national debt and interest payments are high.

Now to define the "snuffle"

The "snuffle" is "public sector net financial liabilities", or PSNFL ("snuffle" with a silent "p", as in "Psmith").Overnight in Washington at IMF meetings, the Chancellor signalled she would be targetting PSNFL in her duality of fiscal rule, in place of the inherited target - which is public sector net debt excluding the Bank of England.The simple way to understand the difference is that public sector net debt is gross debt, minus some super liquid investments, whereas PSNFL subtracts a greater range and larger stock of assets.PSNFL is not a brand-new concept. It is already measured by the Office for National Statistics.

And like all these accounting or social constructs, its importance lies in whether it helps to keep the government honest, or is it a tool for dodgy ministerial cover-ups.The problem with the target Reeves inherited from her predecessor Jeremy Hunt, is that it gives her almost no "headroom" to borrow to fund investment.PSNFL creates this headroom - as if by miracle - in two ways.

  • One: It includes the £20bn annual flow of loans to students as both an asset and a liability, whereas in PSND ex Bank those loans are treated only as a liability.

  • Two: It excludes government losses on the Bank of England's sales of government debt known as gilt-edged stock.

The impact of including the value of the student loan book is the more important miracle of these two.Together they represent the biggest share of increase in the Treasury's capacity to borrow every year to the tune of between £50bn and £60bn, according to the Resolution Foundation and the Institute of Fiscal Studies.These are big bucks. And what matters is that this is quite literally magic money. It is a different way of seeing the government's liabilities, but the liabilities are in all economic reality unchanged.

Reeves will publish her first budget next week. Credit: Pa

The question is whether seeing the liabilities as a snuffle is more rational than the current picture.I would say yes, to an extent.On the positive side, the adoption of PSNFL will allow Reeves to invest billions of pounds every year - in transport, power generation and electricity networks - through her National Wealth Fund and GB Energy, and in partnership with the private sector, relatively unconstrained by her debt target.The reason is that under the PSNFL definitions, the value of equity investments in private companies is deducted from debt.However, if the government were to own 100% of an investment project, in the way it typically does, then the value of that investment would not be netted off PSNFL.

Or to put it another way, adopting PSNFL does not allow for an unlimited investment bonanza.It creates space for investment, but constrained space. As I said at the start, moving to snuffle gives the chancellor the means to begin the reversal of decades of too-low public sector investment. But the recovery won't happen overnight.She won't have a bottomless purse, and because of her second fiscal constraint, that current spending must in time only be funded by taxation (probably by the fifth year of the fiscal forecast).

There will be nothing like a glut for public services.Apart from anything else, if markets were to decide, when all the detail is published next Wednesday, that Reeves does want to raid a near-bottomless purse, that would be a disaster.Debt in the UK - and throughout the rich developed world - is at very high levels for peacetime, and when growth is not generating the tax revenues needed to fund the public services we believe we deserve.

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Therefore, if investors were to fear that the additional debt Reeves will incur will not spur growth, and instead will be more money down the drain, they won't want to lend to her.

And we'll find ourselves in the Truss/Kwarteng vicious cycle of interest rates being forced up and choking off desperately needed economic momentum.Which may be the reason why Reeves is looking a bit pale and drawn. There is a risk that doing the snuffle shuffle could lead to an almighty market kerfuffle.

As I've said in a tediously repetitive way, it's hard to overstate the significance of her first budget next week.

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