It must be bash-the-UK week.
Their central contention — the UK’s recently-acquired reputation as a safe haven is totally bonkers. The Office for Budget Responsibility‘s GDP growth forecasts are way too optimistic and, most intriguingly, the amount of UK government debt is arguably larger than it appears. Very peripheral eurozone, right?
Here’s their thinking and a clue about their timing:
There exists a broad range of government liabilities that are debt, yet are not captured in national accounts. This is true for economies other than the UK and has been discussed in detail by Arnaud Marès (see Sovereign Subjects: Ask Not Whether Governments Will Default, but How, August 25, 2010). However, the UK may gain more attention than elsewhere when the OBR publishes its Fiscal Sustainability Report (July 13).
Debt/GDP Inadequate: UK May Look Worse on a Broader Measure of Debt We look at some of Arnaud’s points on this issue and make some UK-specific observations. The standard gross general government debt to GDP is the most widely used debt metric and the public sector net debt (PSND) measure is the one most often referred to in a UK context. However, we believe that both are inadequate indicators of government solvency. There are three reasons for this that are of particular relevance to the UK:
- * Gross versus net debt: First, debt/GDP is a measure of gross indebtedness. PSND only nets off ‘liquid’ financial assets. These measures therefore overstate the size of the government’s net financial liabilities, especially when – as was the case through the financial crisis – some of that debt is being raised for the purpose of acquiring assets or on-lending (in this case, loans to certain public sector banks and purchases of bank shares). The difference between gross debt and net debt can be sizeable. General government financial assets are in excess of 30% of GDP in the UK currently, for instance. The news gets somewhat worse from here for the UK though…* Debt/GDP looks at the past: The main problem is in the future, coping with the large structural deficits opened up by the crisis and compounded by the fiscal consequences of ageing. What raises questions about debt sustainability is not so much current debt levels as the additional debt that will accumulate in coming years if policies don’t change. The OBR, for example, already ran this exercise assuming that spending and revenues evolve as in the OBR’s November 2010 projections until 2015-16, then incorporating some of the effects of aging onto the projections. Such projections do give cause for concern. Expenditure on health, for example, rises from 8% of GDP in 2009-10 to 10.6% in 2049-50 in this exercise. If these spending pressures are not offset, then this analysis suggests that UK public finances would not stay on a sustainable path. However, things are not quite as bad as they might appear. UK policies are changing …* Missing liabilities: There exists a broad range of liabilities that are debt, yet not captured in national accounts. To take one example, in March 2008 the UK Government Actuary Department valued the government’s unfunded civil service pension liabilities – the contractual claims on government accumulated to date by civil servants – at £770 billion. That is 53% of GDP. There are different ways this liability can be calculated (and it will be particularly sensitive to the discount rate assumed). Further, PFI liabilities and the contingent liabilities acquired over the financial crisis could also be added to the mix for example. We list some of the existing estimates on the scale of some of these items in Exhibit 6.
Now the OBR is scheduled to publish its fiscal sustainability report next month, which, unsurprisingly given the title, will focus on the long-term sustainability of the UK’s public finances. In a paper published to coincide the March 2011 Budget, the OBR gave some hints about its upcoming report.
Or as Morgan Stanley summarised:
* The OBR has stated that the reason for publishing this assessment separately from its other main forecast releases (at spring Budget time and in the autumn) is to “to try to ensure that long-term sustainability analysis gets the attention that it deserves”. [our italics]
* The focus of the report is likely to be wide and further explore and expose ‘hidden liabilities’. As can be seen in Exhibit 7 from the OBR itself, the current headline debt measure, PSND (public sector net debt), covers “a relatively narrow and entirely backward-looking subset of the government activities” that could be considered.
Something to look forward to, then!