There’s been a huge amount of attention over the past week on the UK public finances, but the real story has been overlooked. Yes, the leap in first-quarter public borrowing – some £10bn more than expected as tax receipts fell off a cliff – was a real shock. And yes, the Treasury’s admission that it may scrap Gordon Brown’s rule that government borrowing should not exceed 40% of GDP, while inevitable, was still a real blow to Brown’s credibility. But the real scandal is not that the Government will miss some arbitrary target, but the way it has been able to keep some enormous liabilities out of the official figures.
These include huge debts incurred over the private finance initiative, £100bn of Northern Rock liabilities the Government assumed after nationalising the mortgage lender, debts of Network Rail and – above all – the public sector’s unfunded pension liabilities. The Government does not disclose these. No one at the Treasury, National Audit Office or Office for National Statistics keeps a tally, nor do they make life easy for anyone trying to find out. But if you add up published liabilities of the various individual public sector pension schemes, you get a total of about £800bn.
As pensions expert John Ralfe said in a letter to the FT this week, this liability is the equivalent to an index-linked bond. In an ideal world, it would be recognised on the Government’s balance sheet – along with all the other dodgy off-balance-sheet wheezes – so that we could have confidence the national accounts were an accurate reflection of Britain’s finances. That might also bring some much-needed urgency to the debate over these benefits, which are rapidly becoming an unaffordable burden on the next generation. Best of all would be if the Government agreed to properly fund the debt by issuing index-linked bonds.
Issuing these inflation-linked bonds would deliver a much greater benefit than just boosting transparency. Toby Nangle, a government bond portfolio manager at Baring Asset Management, points out that it would also provide a much-needed boost to private sector pensioners in the UK. The combination of the closure of many private sector schemes over the last few years, plus big changes in regulation, has seen private-sector schemes virtually obliged to load up on government bonds in the last few years. This has forced gilt yields down to very low levels, which has been ruinous for retirees, who are forced to buy annuities priced off government bonds.
Given these benefits, why doesn’t the Government issue more inflation-linked bonds? After all, it’s largely an accounting issue that makes no overall difference to the Government’s balance sheet. The reason is simple: the Government benefits from the lower borrowing rate as a result of the demand for index-linked bonds from private sector pension schemes. So the result is that we continue to be presented with national accounts that bear no relation to reality; the Government continues to make extravagant promises to public-sector workers without ever being held to account; and private-sector workers continue to get screwed.
Leave our idle students to their beds
We keep hearing that British graduates are too drunk, idle and poorly educated to cut it in the new, globalised world. And here’s some anecdotal evidence to prove it: I’m told that just 15% of this year’s recruits to the Goldman Sachs London Office speak English as a first language. Goldman no longer focuses its milkround efforts on elite British universities; instead, partners these days fan out across the continent. Sure, that partly reflects the increasingly cross-border nature of the business. It also makes sense for Goldman to train future leaders who can take the brand into new territories.
Even so, it’s a blow to British students that they were able to bag so few of the most prestigious traineeships the City has to offer.
Still, the Brits shouldn’t lose heart. They can take comfort from one of London’s most successful hedge-fund managers who recently told me that if he wants to hire brilliant mathematicians, he can go out and hire a dozen from the global market in the blink of an eye. What he can’t find – and prizes just as highly – are people with the mixture of confidence, charm and the ability to think on their feet that enables them to bluff their way through meetings and instil confidence in clients – essential City survival skills that a liberal arts British education has always been good at providing.
The snag is that these skills aren’t much required in the early years of a City career – years when many dilettante British graduates are still learning how to get out of bed in the morning. But in time, the Brits come into their own. As my Goldman informant acknowledged: “The best analysts don’t always make the best partners.”
• Simon Nixon is executive editor of
Breakingviews.com
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