Finance: Time to remove the veil on Whitehall's spending

Has the Public Sector Borrowing Requirement had its day? The CBI says a more transparent reflection of official finances is given by the General Government Financial Deficit. And the arrival of Emu has its own imperatives. Paul Gosling reports.

The Confederation of British Industry has joined a growing clamour among leading economists and accountants for the Government to cease using the Public Sector Borrowing Requirement as the primary indicator of the health of its finances. Now that privatisation seems to be moving towards its end, the CBI suggests, further efficiency can be achieved by allowing state-owned enterprises such as the Post Office to borrow as if they operated within the private sector, which the PSBR effectively rules out.

Instead of the PSBR, the CBI argues, it would be better to rely on the General Government Financial Deficit, or GGFD. The GGFD excludes market borrowing undertaken by public corporations and local authorities, and would therefore allow them much greater flexibility than does the PSBR. One benefit of the GGFD is that it is an international concept, recognised under the Maastrict treaty as a measure for assessing economic convergence across the European Union, whereas the PSBR is used only in Britain.

The CBI's report, A question of balance, argues that while the Private Finance Initiative is to be welcomed as a means of achieving efficiencies in the public sector, it is unhealthy that much of the drive towards PFI deals is led by the desire to take finance off the public balance sheet, rather than to achieve greater value for money. Moving towards the GGFD would correct this anomaly. The GGFD also fits more neatly with the adoption of accruals accounting, or resource accounting as it is called in government, where the PSBR reflects the public sector's traditional cash accounting system.

Use of the PSBR can create a misleading picture of the state's economic health, the CBI suggests. Privatisation receipts reduce the PSBR figure, but the disposal of profitable assets may lead to a growth in future government expenditure. Most worryingly of all, the PSBR discourages government from investing in the public infrastructure, even when future receipts would cover the costs. And adopting the GGFD would make year-end accounting manipulation of public bodies' cash- flow pointless, encouraging public corporations and local authorities to produce more transparent accounts.

However, the CBI recognises that simply moving towards the GGFD without implementing new financial controls would be dangerous, since a public body that became insolvent would ultimately have to be bailed out by the government. The solution would be for public bodies to be given greater borrowing freedom only if their accounting systems complied with international standards for public bodies, the System for National Accounts. That would require them to be managed as if they were private corporations; to make "economically significant" charges; and to produce full accounts indicating surpluses, savings, assets and liabilities.

That would not necessarily remove local authorities from central government's financial controls, but would allow them to borrow more freely against their assets where they are involved in ring-fenced activities. Councils could then borrow to invest in their housing stocks provided that the borrowing costs were met out of economically viable rents.

The Treasury says that it is unmoved by the lobbying against the PSBR. A spokesman says: "The Government is sticking with the existing system. We do publish both the PSBR and the GGFD so that people can see how we are meeting our commitments under the Maastrict criteria."

Steve Wilcox, a housing economist whose work was used in the CBI report, says that the Treasury is in practice losing its dependence on the PSBR, even though it will not admit it. "Change has to come with the Government's commitment to preparation for European economic union. We have already moved from a monotheistic to a polytheistic system, which is important."

Mr Wilcox says that Chancellor Gordon Brown's commitment to his "golden rule" - that the country will only borrow to invest, not to finance current expenditure - in practice means that there are now three disciplines guiding the country's budget: the PSBR, the GGFD and now the PSCD or Public Sector Current Deficit as the golden rule is formally titled. "The whole system is moving away from the presumption that a single measure, the PSBR, is the dominant criterion," Mr Wilcox says. "Other changes will be gradual so as not to frighten the horses in the City, but there is no indication that the City is frightened, and the CBI report is a sign of this."

John Hawksworth, head of macro-economics at Coopers & Lybrand, whose work was also used in the CBI report, agrees that the Government is, in practice, now using several budgetary indicators. "It is fair to say that none of the possible measures is a very clear winner, and our view is that therefore you need to look at a range of measures," he says.

The dominance of the PSBR is just a matter of convention, not conviction, Mr Hawksworth says. "The City just follows the Government's lead - if the Treasury says the PSBR is what matters, the markets tend to accept it. There appears, nevertheless, to be a fairly widespread recognition in the City, as well as among academic economists, that the PSBR is flawed both as a measure of the underlying state of the Government's finances and as a basis for fiscal control."

Just as companies are judged by City analysts on a far wider set of measures than just how much they borrow, so, too, should the Government, Mr Hawksworth says. Perhaps the state's accounts really are moving inexorably closer to the private sector's.