Duncan’s Economic Blog

Debt & the CPS: Misleading and Wrong

Posted in Uncategorized by duncanseconomicblog on October 20, 2009

The Centre for policy studies published a pamphlet by Tory MP Brooks Newmark last Friday. It states the public sector debt is far higher than commonly believed (hattop to Commentator Dannyboy for bring this to my attention). (thanks to commentator Dannyboy for mentioning it). It really has rather annoyed me. The results are summarised below:

 CPS

 

 These figures are at best incorrect and at worst seriously misleading. Whilst the ‘official net debt’ figures appear to be correct, every over category is open to question.

Public Pensions

Pensions represent a future, uncertain liability not a current ‘debt’. As Mr Newmark writes:

Estimating public sector pension liabilities is notoriously difficult. Calculations are affected by assumptions on individuals’ pension tenure, their final salaries, the method of indexing pension benefits and the longevity of public sector workers.

 However, the precise size of the liability is, to some extent, theoretical, even nebulous, not least because of the dramatic impact of interest rate changes on the figures.

 Despite this he feels confident to state the rather precise figure of £1,104bn.

Mr Newmark also neglects to mention that there is little agreement in the accounting profession as to how to accurately account for pensions, a problem that affects both the public and private sectors. As PWC have noted:

There are some problems in accounting that refuse to go away. Deferred tax, goodwill and the impact of changing prices have been debated for decades, and accounting for pensions is another subject ripe for debate. The IASB issued a discussion paper in March representing new proposals for significant change in this area.

 PFI

Mr Newmark provides some detail on how the £139bn figure was derived:

According to HM Treasury, the capital value of PFI projects is now £64 billion, with an additional £181 billion of unitary charge payments due until 2047. If the total of £245 billion is discounted to present value (using a 2% growth rate), this is equivalent to £139 billion worth of liabilities that are not included on the balance sheet.

However he makes no mention of why a discount rate of 2% was chosen. Using a rate of 4% radically changes the present value of the liability. Using a 2% discount rate is particularly strange given that the Tories, according to David Cameron, believe that ‘printing money leads to inflation’.  I don’t what the right rate to use, neither, I suspect, does Mr Newmark.

Network Rail

This is simply misleading. Net Work rail is listed as liability worth £22bn. But look at the balance sheet. It has liabilities of £32.9bn (it has other liabilities as well as the debt) but assets worth £40.1bn. It’s net book value is £7.2bn. Last year it made a profit of £0.6bn. This shows the folly of simply looking at one side of the balance sheet.

Bank Bailout

Here Mr Newmark seems quite confused. £130bn is certainly plausible but it’s a guess. (Our stakes in Lloyds and RBS are currently worth £29.9bn). Scanning the report I’m not at all sure of the methodology used to reach that figure, they seem to conflate several issues – looking at the banks’ debt but not assets, guessing what future write downs will be, etc. I think this one remains very difficult to judge.

As Newmark says:

The eventual cost of Government support for the UK economy and banking sector remains uncertain.

The £130bn figure comes from this IMF report.  A report written on March 6th this year. It notes: 

The medium-term net budgetary cost of financial support operations will depend on the extent to which the assets acquired by government or the central bank will hold their value and can be disinvested without losses, and the potential loss from guarantees.

Since then the markets are up by approximately 50%.  Which should bring down that £130bn figure quite a lot!

If Mr Newmark is so keen on the IMF report, I wonder why he neglects the following table:

imf

4 Responses

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  1. Liam Murray said, on October 20, 2009 at 11:28 am

    Doesn’t this duck the central question Duncan – “is public sector debt higher than commonly claimed by the government?” Partisan ramblings by the CPS aside the answer to that, even accepting everything you point out above, remains a resounding yes and I suspect that’s the main concern for independent voters like me.

    If the government say £800bn and CPS say £2,200bn then it’s not enough to label the CPS numbers as misleading without questioning whether the £800bn government figure is entirely fair. Since your breakdown above simply suggest they’ve overcooked the ‘add-ons’ (rather than saying they don’t exist) then I’m left with the view that both the government & the CPS are misrepresenting the figures.

    I’ll never get the opportunity to vote against the CPS….

  2. duncanseconomicblog said, on October 20, 2009 at 11:51 am

    Depends on accounting techniques. But yes, it is higher than is usually claimed. But I suspect no where near as high as the CPS claim.

    The same could be said for lots of companies – depends upon accounting rules.

    I’d go much closer to the £800bn than the £2,200bn.

    Equally I think just talking about debt is misleading. Look at Network rail – who cares if it has £22bn of debt? It has assets and makes a profit. To present it as some kind of burden on the government is very strange.

    • dannyboy said, on October 20, 2009 at 4:01 pm

      Good stuff duncan. I’ll drop you more tidbits of iffy scaremongering as I receive them.

  3. Just passing said, on October 21, 2009 at 1:44 pm

    The IMF table does show the UK’s public debt growing faster over 2007-2014 than any other country…

    Just sayin’.

    (You’re quite correct about the folly of looking at the debt side of the Balance Sheet – but it’s a folly the Government are prone to, hence their plan of selling assets amidst fallen markets to lower the deficit.)


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