It was an innocuous enough looking press release, as most of those produced by the Office for National Statistics are. "Improving estimates of public sector debt", read the headline. My word, that really is one to set the pulse racing in anticipation.
But hold on. What's this? If you can bring yourself to get past the first page, you discover that what this exercise in mystification is all about is the extent to which Private Finance Initiative and Public Private Partnership projects should be classified as public debt. Someone, somewhere, has decided that only £5bn out of PFI and PPP projects with a total value of £48bn needs to be accounted for in this way. The rest, including all but five of the 150 PPP projects for the National Health Service, can go take a hike.
The PFI, later renamed the PPP, was invented as a way of persuading the private sector to finance what would otherwise have had to have been publicly funded capital investment. The whole point of the PFI is to keep these projects off the Government's balance sheet, so that public funds can be spent on other things instead. Isn't that just cosmetic? Well, as it happens, yes.
The reason this has long been a bone of contention is that the PFI is in reality no more than an expensive way of buying on the never-never. The private sector finances and builds the new hospital, but the public sector ultimately ends up paying the rent. Since the public sector can borrow more cheaply than anyone else, it would arguably be better for the Government to fund and build the thing itself. But would the markets allow such profligacy?
As ever, when the detail is examined, there are all kinds of excuses for the way in which these projects have been classified. Some are at a design stage, or under construction, and therefore not operational. In those circumstances, the Government is not yet making lease payments. In other cases, the Government is deemed not to be the economic owner, as the obligation for repair and maintenance lies with the private sector operator. Eat your heart out, Ken Lay. Real ingenuity must have been required to dream up that one. For offshore, special-purpose vehicles designed to hide Enron's true liabilities, read the PPP.
The reason all this is important is that, when he first came to power, Gordon Brown, the Chancellor, set himself rules to govern the public finances so as to win credibility with the financial markets. One of them was the sustainable investment rule, under which public sector debt must always remain below 40 per cent of annual output. The £5bn of PFI projects the ONS has added to the public books makes no difference one way or the other. Yet £48bn amounts to about a percentage point of GDP, and would put the Government dangerously close to breaching its own rule.
Personally, I've long taken the view that these rules no longer matter very much. They may have been important once, when the Chancellor needed to demonstrate his financial prudence, but he's now done that, and the rules have as a consequence largely outlived their usefulness. The bottom line is that Britain's public finances are in better shape than almost anywhere else in the developed world despite present, very high levels of public spending.
Yet the Chancellor still feels the need to go through the charade of demonstrating his financial prudence by pretending he is rigidly adhering to the rules. The contortions necessary to do this grow ever more transparent and laughable - witness the continued dispute over whether Network Rail's £20bn of debt should be on or off the books. The big picture is that keeping even as much as £48bn off the books isn't in the scale of things of any great significance. The more narrow one is that it is indicative of dishonest government. And ministers wonder why the public don't trust them any longer.
Britain's prosperity: where's the benefit?
If further support were needed for the view that interest rates will need to rise again before the end of the year to deal with inflationary pressures, minutes for the last meeting of the Bank of England's Monetary Policy Committee, published yesterday, provide it in spades. The meeting was not overly hawkish, but members did express concern over the pick-up in inflationary expectations and the possibility that the present spike in inflation might affect wage settlements.
They are certainly right about this. Forget the consumer price index targeted by the Bank, the retail price index more commonly used by employees for pay bargaining purposes is threatening to breach the 4 per cent mark. In usual circumstances, this would produce significant second-round inflationary effects. I'll return to the contention that it might not later on.
The minutes also suggest that, even after the August rate rise, the committee thinks that monetary policy remains "accommodative" - jargon for not yet tight enough to choke off inflationary growth.
In any case, there was little in the minutes which would cause the markets to change their view of another quarter-point rise before the year is out, if not next month then certainly the month after. Other data announced yesterday lends further support to this prediction. You might have thought a reviving housing market against the backdrop of a rising interest rate environment was a contradiction in terms, yet August mortgage lending was the highest on record and house price inflation is again climbing sharply. The Bank of England's regional agents' survey meanwhile shows that businesses are managing to push through price increases right, left and centre.
The concern therefore becomes a more pressing one than the certainty of another quarter point - that, despite the fast-slowing US economy, the Bank may have to apply much more violent monetary action to bring prices back under control. The primary reason for thinking otherwise lies with the growth in the workforce brought about by increased immigration and labour participation. This is providing a very significant brake on wage inflation. Companies have attempted to absorb higher energy prices by bearing down on wage costs, rather than passing them through in the form of higher prices.
The apparent slack in the labour market has made this easier for employers than it otherwise would have been. Even so, profit margins have been squeezed. If demand improves, companies may seek to rebuild these margins by raising prices. We are in largely uncharted waters here. It is many years since Britain has seen a comparable expansion in the workforce. The relationship between this expansion and prices is not yet properly understood, and, in any case, what happens when the expansion comes to an end?
What we can be fairly certain of is that, though rates are on the rise, they would be a lot higher still but for our friends from eastern Europe. More workers means more subdued wage inflation, but it also spells more pressure on the housing market and even higher house prices. Some voters are beginning to question the benefits of this golden era of non-inflationary growth. One of the great truisms of history is that the more prolonged the period of prosperity, the more fractious and dissatisfied the general population becomes. The policymakers, it would seem, just can't win.
Russia's Sakhalin-2: a question of timing
A reader points out that the terms of Shell's involvement in Russia's Sakhalin-2 gas development were negotiated well before the Russian debt crisis, not immediately afterwards as mistakenly reported in yesterday's Outlook. The point none the less still stands. Desperate for foreign investment and at a time when the oil price was down in the dumps, Russia agreed extraordinarily favourable terms which it is now trying to row back on.Reuse content