Monday, 11 July 2011

OBR Financial Sustainability Report: ConDems lick their lips…

On Wednesday the Office for Budget Responsibility publishes its first Financial Sustainability Report which will ‘present long term projections for public spending and tax revenue, describe the public sector balance sheet, and set out summary indicators of the long term sustainability of the public finances’.

The FT reports today that ‘after years of delay, the Government will give the first glimpse of what the UK’s public finances would look like if the UK were a listed company such as Marks and Spencer or BT’.

The consequence?

Counting the future liabilities of the accrued pension rights for public sector workers and the future costs of private sector finance initiative projects will inflate the apparent liabilities of the state and send the calculated assets of government deep into the red’.

Pensions alone could add between £800bn and £1200bn to the estimate of current government liabilities, depending on the discount rate chosen. PFI will account for tens of billions more. This is surely a disaster for an economy at ‘risk of becoming the next Greece’? Er, no. As the FT goes on to say:

Experts welcomed the new transparency but cautioned that the new liabilities shown did not represent debts that had arisen out of the blue. Future assets, such as the ability to collect tax and imprison people who refuse are not counted in the new balance sheet’.

Carl Emmerson of IFS is quoted:

Unlike in Greece, where a new Government uncovered significant new debts that had been brushed under the carpet, any additional liabilities shown under new accounting rules are known and discussed’.

I usually stay very well clear of the forecasting business but here’s what I think will happen on Wednesday:

The OBR report will estimate liabilities in line with FT predictions above. Ministers and their supporters will immediately claim the report as additional evidence to support austerity. They will not miss the opportunity to present the report as signalling a new era of Government transparency and more evidence of the secrecy and profligacy of their predecessors.

Although the outlook for the UK’s long-term financial sustainability will not change with publication of the report expect a frenzied reaction designed to leave the uninformed with the impression that spending cuts and pension reform (wage cuts) are unavoidable if the UK is to avoid the fate of Greece, Ireland, Portugal, Spain and now Italy.

What will be the response of the markets to the report? I think they will shrug. Of course, by the Government’s own logic, any new information confirming a significant deterioration in the public finances should provoke a negative reaction in the markets. But the markets know very well that what Carl Emmerson argues above is true and that the OBR report changes the UK’s relative fiscal position not a jot. I also think that those who consistently invoke the markets as a justification for austerity will do as they always do – ignore what the markets are actually saying today in order to focus portentously on what they might say tomorrow.

Meanwhile, the new labour market stats also published on Wednesday morning will be cherry picked and the stream of shocking economic data pointing towards very low or even negative Q2 GDP growth ignored or dismissed.
That is my prediction.

Stephen Boyd - STUC

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