The true cost of the UK’s liabilities
November 23, 2010
Last week, ConHome noted the absence of any questions at PMQs about Britain’s role in a potential bailout of Ireland. With the possibility of the UK contributing billions of pounds to help shore up our near neighbour’s economy, the Opposition leadership instead focussed all six of their questions on police numbers.
It was an episode symptomatic of our increasing national immunity to big figures. The more we have read about ‘billions’ over the course of the financial crisis, the more intense our focus seems to have become on waste or impropriety on a smaller scale. When in the middle of last year we were shovelling cash into the banking system, quantitative easing barely touched the public consciousness when compared to parliamentary expenses claims lodged for duck houses and dog food. When RBS owned up to Britain’s largest ever annual corporate loss of £24.1bn, it was Sir Fred Goodwin’s annual pension of a relatively trifling £693k that stole the show. Last week, as crisis in the Eurozone threatened to suck more British billions into stabilising the European financial system, the Prime Minister’s £35k photographer hogged public outrage.
Anyone partial to conspiracy theories might be inclined to wonder whether politicians contrive such scandal to divert attention from wider, scarier reality. I suspect the sadder truth is that none of us, politicians included, is able fully to comprehend the scale of what has happened to our financial system any more, let alone assess the long term consequences.
This might explain why the £200bn worth of payments we still collectively owe under PFI contracts fails to elicit much interest. Some of this colossal bill will not be paid off until 2047 and sits atop a motley collection of other horrors (unfunded pensions, net debt, bank guarantees and more) that take the UK’s overall liabilities to an estimated £3.8 trillion. If any of my generation is interested in taking the hit now to remove this burden from our children, how does the prospect of paying 30% more in tax sound?
There is perhaps no better symbol for the nation’s financial attitude over the past decade than PFI. The mechanism of the Private Finance Initiative was designed as a means of bringing finance and development expertise from the private sector to public infrastructure projects – schools, hospitals, roads and so on. It was an idea with great promise, designed to make up for a dearth of practical knowledge in the public sector. Instead, it became perhaps the greatest gravy train of them all, heaping colossal debt on the next generation through ‘buy now, pay later’ deals. But worse than that, it played its part in insulating yesteryear’s politicians from tough discipline on public spending and having to educate the public on the limits of the national bank account.
So what went wrong? In essence, in his bid to ensure the Labour government took the kudos for sparkling new schools and hospitals while avoiding current accounting of its cost, Chancellor Brown used PFI as a means of keeping infrastructure investment off the public balance sheet by entering into long term deals. While the capital value of PFI contracts was only £55bn, the vastly higher sum that we will eventually pay reflects the huge mark-up costs of lengthy maintenance contracts. It was a political masterstroke by the erstwhile Chancellor, allowing him to boast of prudence by keeping the headline proportion of public debt to GDP below 40%, as promised, whilst at the same time generously ‘investing’ in public services for immediate gratification.
He (correctly) calculated that by the time his trick was revealed, it would not only be someone else’s problem but would prove too complex a manoeuvre to capture the public’s imagination. After all, what is the more terrifying prospect to politicians? Telling their constituents that the last government has given the country 37 years to pay off a £200bn bill or that the current government is cutting the number of police patrolling their local neighbourhood? The other smart strand to his ruse was that the other chief beneficiaries of these flawed PFI deals were middle class professionals (consultants, lawyers, architects, accountants, building contractors), normally the most vocal and articulate critics of public sector waste.
Unfortunately the true cost of the UK’s liabilities now presents the sternest of challenges for the coalition government at a time when huge infrastructure investment is still required. Big decisions on energy and transport infrastructure were ducked by the last government and it is calculated that we ideally need £500bn of infrastructure investment by 2020 on energy (£300bn), transport (£130bn), ICT (£30bn) and water (£40bn). Much of the money for this will, of course, come from the private sector but the government will have to make its contribution too – indeed it will prove essential to economic growth. The Comprehensive Spending Review recognised this but shelling out for these essential projects will nevertheless divert money from other, less critical infrastructure and maintenance tasks, such as regenerating our increasingly shabby suburbs.
Earlier this year I highlighted on this blog our increasingly shabby suburban districts. One of the unsung triumphs of the past 25 years has been the regeneration of city centres in places like Glasgow, Birmingham, Liverpool and Cardiff which have become attractive places to work and live. The same, unfortunately, cannot be said for many formerly prosperous suburban areas. In many of these areas, potholed roads and tatty looking street furniture make way for tired high streets where, in the aftermath of the credit crunch, many shop units still lie empty. It will fall to a group of relatively inexperienced Conservative council leaders to revive our suburbs and local transport infrastructure at a time when funds for regenerating them will be scarce. Keeping political control of these districts will be an increasing challenge, not least as they are likely to play scene to entrenched youth unemployment and swift demographic change.
The blame for PFI’s consequences will not be kept from the coalition’s door for long. Only briefly will there be any interest in our laying the blame squarely back at Labour’s feet. That’s politics. But we can at least learn some lessons.
Never again should ministers proudly pledge a new hospital, a new road or revamped school without being transparent about the true cost. In halting the desperately poor-value Building Schools for the Future programme, the coalition has gone some way to recognising this already. It is also vital that we devise a stable, long-term policy framework to attract private sector investment to ensure that critical infrastructure can go ahead. Above all, of course, government, whether national or local, needs to be far more aggressive about the deals we strike.
Just as the credit card and easy mortgage finance gave individuals the chance to consume beyond their means, PFI satisfied the desire for instant gratification by politicians, allowing them to break out of the straitjacket of economic prudence without anyone at the time fully appreciating the mirage. So a generation broke the link between work and reward and fed a culture of indifference to the future. However, it should have been the duty of government to take greater responsibility, to have some consideration for the interests of younger generations to come.
In an age of unprecedented global mobility for our brightest and best, too many of those whom we now rely upon to drive this nation forward in the decades ahead may rationally conclude that better opportunities and possibilities await beyond these shores.