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Brooks Newmark MP: Gordon Brown - Iron Chancellor or Enron Chancellor?

Newmark_brooks Brooks Newmark is MP for Braintree.

Gordon Brown's buzzwords since 1997 have been prudence, transparency and accountability.

But there are increasing signs that the Chancellor is systematically understating the true extent of the Government's debt because of lax accounting standards.

In a study co-authored with Stephen Hammond MP, entitled Simply Red: The True State of the Public Finances, we have looked at two of the main problems.

Our study has found that the total public sector net debt is not £487bn, as the Government claims, but well over a trillion pounds. Using some cautious, assumptions we have pegged the true public sector net debt at a staggering £1.34 trillion.

Not only does this figure exceed Gross Domestic Product, but also the UK's £1.2 trillion consumer debt mountain; and it is equivalent to £53,000 of government debt for every household in the UK.

The first cause for concern is the way in which the Chancellor has financed public sector investment through the use of the Private Finance Initiative. When the last Conservative Government developed PFI in the early 1990s, Gordon Brown hailed it as "a cynical distortion of public finance" – and that is just what it has become on his watch.

PFI works very simply by transferring the risk of projects failing, from the Government to the private sector. This is a fine principle which ought to lead to tighter project management and better value for taxpayers.

But all too often the risk of failure is not actually transferred because the Government still has to step in to bail out failing public services like hospitals and schools.

One high profile example was the announcement last year that the Queen Elizabeth Hospital in Woolwich would have faced deficits of £100m if its PFI debt had not been restructured.

PFI finance also combines the up-front capital costs of investment in public services with the cost of running them in the long-term, often over a period of 25 years or more. This not only inflexible, but also means that much of the Government's present investment in public services will be funded by the next generation of taxpayers. In other words, the reality is that PFI has become a type of disguised borrowing programme.

In the last year, the Office of National Statistics has made three separate revisions to the Government's accounts because PFI debt has been understated, adding over £11bn to the public sector debt total. But liabilities, like the £18bn clocked up by Network Rail, are still unaccounted for. And the ONS has not even attempted to quantify the cost of local government PFI schemes which may potentially need to be bailed out by central government.

Rather than adding to the Government's accounts in dribs and drabs, we need to reappraise the way that PFI has been used by Ministers as an accounting fiddle.

And, while we are at it, we should also add a figure representing the potential cost to government of bailing out PFI deals which have gone bad. The Government already admits that about £20bn of PFI debt is accounted for, but an independent study by Capital Economics recommends that that figure should be more than doubled to represent the risk of PFI defaults.

Gordon Brown has said that the Government "follows exactly the same rules as were followed by the previous government, except for one thing – we tightened up the accounting standards". But that is untrue. The announcement in the Queen's Speech of a new Bill to guarantee the independence of statistics is an opportunity to clean out the Augean Stables once and for all.

The second problem is of even greater concern because the numbers involved are so much bigger. The Treasury admits that pension liabilities, which are unfunded and backed only by the Government's future tax-raising powers, reached a total of £460bn in March 2004, none of which appears in the Government's accounts.

But the size of those liabilities, and Whitehall's ability to meet them in future, is determined by the discount rate, and other actuarial assumptions, that are used to calculate them. Our study puts the total cost of central and local government pensions at over £800bn, and other independent analyses go much higher than that.

These numbers will have a huge impact on future generations. One of the principles underpinning Gordon Brown's much vaunted "Golden Rule" is "that the Government does not pass on the costs of services consumed today to the taxpayers of the future – each generation is expected to meet the current costs of the public services from which they benefit".

This is usually simply referred to as "generational fairness". But the truth is far from fair because spiralling unfunded pension liabilities mean that tomorrow's taxpayers will have to fund today's deficits. Alternatively, those who have made their pension contributions in good faith will see their entitlements crumble.

The Government is sticking its head in the sand by not being open about the assumptions used to calculate pension liabilities. A study conducted by PriceWaterhouseCoopers recently concluded that "there is a good case for the Government to publish more detailed and readily accessible information on the value of public service pension liabilities" instead of the "rather fragmentary evidence currently published".

The principle of greater transparency in the public finances has cross-party support. The public has a right to know the true extent of the liabilities which future generations of taxpayers will have to meet.

But action to control the debt that is being incurred for future generations cannot be taken without an honest assessment of its true extent and, in the Chancellor's words, by "ensuring that fiscal decisions are fully transparent and accountable".


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