Britain’s underlying public finances are among the worst in the world, behind the Gambia, Uganda and Kenya, a new study has concluded.
International Monetary Fund (IMF) economists found that £1 trillion had been wiped off UK public sector net wealth since the 2008 financial crisis, largely thanks to bank bailouts and increasing pension liabilities.
The IMF looked at the assets and liabilities of 31 countries and found the UK was in a worse position than every other country apart from Portugal.
This surprising conclusion came from using a different approach to the public finances to the one favoured by the government.
Rather than looking at each country’s debt and the deficit – a government’s income minus its expenditure – the IMF’s approach takes into account the benefit of assets such as publicly owned corporations and natural resources. These figures more closely resemble a company’s balance sheet.
The IMF said the cost of bailing out banks had been a significant factor dragging the UK down the rankings. The UK also has one of the largest pension liabilities of any nation in the study but is towards the bottom of the pile when it comes to public assets.
Using the public sector balance sheet method, countries such as Gambia, Uganda and Kenya rank above the UK because, while they have smaller assets and liabilities than Britain, they have a higher net wealth relative to GDP.
The IMF’s report takes particular aim at the privatisation of public assets, the benefits of which it says are often merely an “illusion”.
The UK has undergone one of the most drastic privatisations of any economy since the early 1980s.
Under the Conservative government since 2015, policy has gone a stage further, incentivising departments and local authorities to sell off assets to fund day-to-day spending under the premise that such an approach is necessary to cut the deficit.
But the IMF economists said the tendency of governments to focus on debt “misses large swaths of government activity and can fall victim to illusory fiscal practices”.
When public assets are taken into account, selling a public utility, for example, may do nothing to improve the public finances, the IMF said.
“For instance, privatisations increase revenue and lower deficits but also reduce the government’s asset holdings,” the report stated.
“Similarly, cutting back maintenance expenditure reduces the deficit and lowers debt, but also reduces the value of infrastructure assets, which could cost more in the long term.”
In this view, Labour’s proposal to renationalise railway franchises and water companies would not, as the Conservatives have claimed, cost hundreds of billions of pounds.
The government would merely create debt on the liability side of the balance sheet while gaining an asset of the corresponding value, resulting in a net cost of zero.
The asset in turn has the potential to generate future income. For example, privatised water companies paid £6.5bn in dividends and interest to shareholders over the last five years, according to data compiled by the GMB union.
The IMF also warned on Tuesday that Brexit is among the primary risks to global economic stability.
The Washington-based organisation urged financial institutions to “step up their preparations for a post-Brexit landscape”, including for a no-deal scenario.
It warned that concerns about a no-deal Brexit appear to have increased, driving volatility in the pound and suppressing company valuations.
The IMF pointed to “growing anxiety” that Brexit negotiations could break down, increasing uncertainty in the UK and beyond, potentially triggering a “sharp tightening of global financial conditions”.
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