21 March 2008
Vital public investment will not be sacrificed merely to avoid breaching the sustainable investment rule when International Financial Reporting Standards come into force, Alistair Darling has indicated this week.
The chancellor signalled to senior backbench MPs that adoption of the standards, expected to see many Private Finance Initiative liabilities included in public sector net debt figures for the first time, would not mean the end of the substantial programmes of infrastructure investment seen in recent years.
Fears of public spending cuts have been heightened as Darling battles to meet the government's sustainable investment rule, which stipulates that PSND must remain below 40% of gross domestic product. These were stoked by last week's Budget, when he predicted that PSND would rise to 39.8% of GDP in 2010/11, just squeezing in under the threshold.
But, during an evidence session on March 19, Darling told the Treasury select committee that he did not want the move to IFRS to lead to investment strategies being distorted.
'The PFI has enabled us to do a lot of building of schools and hospitals that we wouldn't otherwise have been able to do. I don't want us to get ourselves into a position where we reach decisions that no rational person would reach because of a change that might be made.'
Up to £30bn of PFI liabilities could be reclassified as public debt following the adoption of IFRS, which was delayed by a year to 2009 in the Budget because the Department of Health and the Ministry of Defence said they could not make the switch in time. That would be more than enough for PSND to shatter the 40% ceiling.
Darling told MPs that he was 'still reflecting upon' the question of how PFI liabilities should be treated under IFRS, but he repeatedly stressed his desire to protect public investment. For that reason, he argued, the public liabilities generated by last month's nationalisation of Northern Rock should not unduly influence decisions on public spending.
'It would be absolutely bonkers to take account of Northern Rock in relation to the sustainable investment rule because, frankly, we'd have to cut large amounts of public expenditure to take account of what is a temporary arrangement.'
He also rejected claims that the government had been profligate by continuing to borrow in previous years when the economy was in surplus, leaving him with little room for manoeuvre now there was a slowdown. Darling countered the criticism by saying it would have prevented necessary investment.
'If we'd had another rule which said we can't borrow when the economy is growing above trend, that would have resulted in quite a substantial cutback in public investment.'
Looking ahead, the chancellor insisted the Treasury's Budget forecasts on economic growth, taxation and spending remained 'reasonable'. Committee members pressed him on the issue, pointing out they were drawn up before the latest stockmarket turmoil in the wake of last week's near-collapse of US investment bank Bear Stearns.
But Darling insisted the figures had not been undermined by events in recent days. 'The forecasts we made last week in the Budget are for the long term,' he insisted.