Pensions and Roads – Hiding the Deficit

 

The BBC reports that the Government is about to take over the Royal Mail pension scheme.

Because the scheme has a £7 billion deficit, it is a huge obstacle to the Government’s plans to sell off the Royal Mail. For this reason, this deal is subject to approval by the European Commission (as it could be seen as unfair State aid to Royal Mail).

There is another aspect of this that is more interesting though.

The scheme has estimated liabilities of £35 billion. The Government will assume those liabilities – in other words, the pensions of Royal Mail workers will become unfunded pension liabilities, just like those of the NHS, for example. Those pensions will be paid out of future tax revenues.

The scheme’s assets, though, are another matter. They amount to £28 billion. Because of the way the Government accounts for such things, that £28 billion will be accounted for as an immediate windfall – a big reduction in the Government deficit this year.

It just highlights what many, including the Taxpayers’ Alliance, have been drawing attention to for some time. The Government has huge liabilities stretching into the future that are not on its books.

Meanwhile, the Government has suggested it will introduce private finance for road-building.

Don’t think that necessarily means tolls though.

Alasdair Reisner, from the Civil Engineering Contractors’ Association, told BBC Radio 4’s Today programme that one option was a system of “shadow tolls”, whereby the motorist does not pay the cost but private firms are paid by the government depending on the amount of traffic using a road.

In other words, a private company borrows the money and gets paid back with interest by the Government over a period of several years. Because the Government itself doesn’t borrow the money, it never appears on the Government’s balance sheet as a debt.

Gordon Brown did that with hospitals. It was called the “Private Finance Initiative”. And in fact it was pioneered by the previous Conservative Government of John Major.

The Parliamentary Treasury Select Committee’s inquiry into that said:

Higher borrowing costs since the credit crisis mean that PFI is now an ‘extremely inefficient’ method of financing projects.

In fact

Analysis commissioned by the Committee suggests that paying off a PFI debt of £1bn may cost taxpayers the same as paying off a direct government debt of £1.7bn.

And that is not really surprising. Private companies pay a lot more (at least twice as much) to borrow than the Government itself does. And the additional bureaucracy and costs of tendering add more costs.

What these deals – Royal Mail pensions and PFI roads – have in common is that their real purpose is to hide the true extent of Government debt. In their keenness to do that, the Coalition are once again exactly the same as Labour.

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