News analysis - Lies, damned lies and public spending

1 Nov 01
Pressure is mounting on the Treasury to come clean on how public spending is officially defined in the wake of the Railtrack collapse and allegations that it disguised projected spending increases as tax credits. A new European convention due to be ag

02 November 2001

Pressure is mounting on the Treasury to come clean on how public spending is officially defined in the wake of the Railtrack collapse and allegations that it disguised projected spending increases as tax credits.

A new European convention due to be agreed shortly may force the government to present Chancellor Gordon Brown's ambitious plans for child and pensioner tax credits as straightforward spending commitments.

The Tories last week claimed these tax credits, together with the Employment Credit that is due to replace the Working Families Tax Credit, amounted to unstated spending worth more than £5bn. Their calculations were based on old estimates by the Institute for Fiscal Studies that are now being revised.

This week Liberal Democrat Treasury spokesman Matthew Taylor will press the government to cost its 'contingent liabilities' to Railtrack, the London Underground public-private partnership and similar schemes, which they say are promises to spend which do not appear as such in the public accounts. The Department for Transport, Local Government and the Regions has indicated it would provide financial backing for 'son of Railtrack', the non-profit entity that is supposed to emerge after Railtrack is wound up. The City insisted the new body's likely credit rating had to be established by means of a government guarantee.

An example of the problem of defining public spending is National Air Traffic Services (Nats), 46% of which was sold earlier this year to a consortium of airlines. Ambitious plans to invest some £1bn have been shelved and City analysts are now saying if the air travel market declines further the government will have to pump in revenue support.

Nats' estimated annual income of £600m looks like being cut by a fifth this year. Since the government would have to keep air traffic control going in all circumstances, critics say that that commitment should be entered in the public accounts as a spending liability.

Similar overhanging liability is associated with British Nuclear Fuels, with inescapable decommissioning costs of £34bn around its neck.

Liberal Democrat spokesman Rob Blackie said the Treasury's source book on such classification, entitled Management of risk: a strategic overview, was supposed to have been lodged in the Commons' library but they had not yet found it there.

Nobody had a clear idea how to assess the government's continuing responsibility for service provision. He said National Audit Office studies were often confined to particular projects and did not illuminate the bigger picture.

Professor Helen Margetts of the school of public policy at University College London said the problem of risk transfer went to the heart of the Private Finance Initiative conundrum. 'With these very large contracts, such as London Underground or the National Insurance recording system, you have to start asking where the public/private boundary is actually located.'

In theory, the way spending is presented is governed by a European convention agreed in 1995, based on United Nations accounting standards. Under it, the Office for National Statistics determined that government backing for loans to the fixed link to the Channel Tunnel should not count as spending.

Transport Secretary Stephen Byers recently went to the ONS for an opinion on government support for the new Railtrack. According to ONS, promises of support by the DTLR can be kept off the books if there is 'little likelihood' of it being called for. A spokesman declined to put a figure on this probability.

'Some of this is theology,' according to Professor John Hills at the centre for the study of social exclusion at the London School of Economics. 'The key numbers are what is happening to net demands by the state on different kinds of individuals and the other what is happening to the long-term sustainable tax rate.'

That is where the political argument begins. The Tories are claiming Gordon Brown will be forced to increase taxes, probably National Insurance, from April 2003, coinciding with the introduction of the three new tax credits.

Earlier estimates were that the new pension credit would cost £900m a year, the integrated child credit £1bn and the employment credit £500m.

But the need for taxation hinges on the future growth of the UK economy (surprisingly high still) and government revenues. Treasury officials are anxiously examining data suggesting that despite continuing economic growth, the tax take is not producing as much as it did.

Government receipts increased by 2.6% from April to August this year, against a forecast of 4.3%, even though GDP had grown pretty much in line with Treasury expectations.

Just after September 11, analysts downsized the projected government surplus for 2001/02 to as little as £200m. It is now expected to be bigger, though well under the £16bn originally forecast by the Treasury.

PFnov2001

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