In 1997 the UK fiscal framework was substantially reformed, including through the legislation for the Code for Fiscal Stability (1998). This was related to developments in countries, such as New Zealand and Australia, which had sought to enchance the credibility of fiscal policy alongside similar attempts to enchance the credibility of monetary policy. The Code for Fiscal Stability requires the Government to set out its objectives for fiscal policy and the operational rules it uses. The UK Government has set two fiscal rules. This papers focuses on the sustainable investment rule, or the debt rule, which requires the Government to hold public sector net debt as a share of GDP at a stable and prudent level over the economic cycle.
The paper begins by briefly reviewing the reasons why governments accumulate debt and the history of government debt in the UK. It also considers some of the costs of high debt levels. Section 1 reviews the academic literature on fiscal sustainability and considers why a limit on debt levels may be desiderable. Section 2 then discusses the case for debt rules in general and the role of the debt rule in the UK fiscal framework in particular. In Section 3, the paper illustrates how the debt rule is used to assess the long-term sustainability of the UK’s public finances in the light of an ageing population drawing on the Government’s Long-term public finance report published last year. Section 4 concludes.