The British government recently assumed the £37 billion liabilities of the Royal Mail pension fund. As a result, government borrowing was reduced by £28 billion. Yes, you read it correctly. The explanation is that, by convention, unfunded pension liabilities do not represent government borrowing while, by a different convention, public assets intended for sale – such as securities formerly held by the Royal Mail fund – may be offset against borrowing.
And, as my colleague Chris Giles has explained, the government has also decided the interest the Bank of England receives on the securities purchased through quantitative easing should be credited to the government’s revenue account. Nothing of substance has changed but the reported public deficit is reduced to a level consistent with the government’s borrowing targets.
During the Thatcher years, politicians began to take an unhealthy interest in how official statistics were compiled. The regime of Gordon Brown took statistical prestidigitation to new heights. The economic cycle was redefined several times, always with the result that the target of controlling borrowing over the cycle had, despite appearances, been met. The status of Network Rail and its financing arrangements were reformulated several times to pretend the body responsible for Britain’s rail infrastructure was not an agency of government – which it manifestly was – and that its borrowings were not guaranteed by government – which markets knew they were; an episode of which the mandarins of Yes Minister would have been proud.
For a time, the coalition government seemed willing to let figures tell their own story rather than one written by their political advisers; but that time seems to have passed. Hence the drive to present data in a flattering way.
But who are these manipulations designed to deceive? Perhaps they fool nobody, except, on occasion, their perpetrators. Most voters have no idea of the levels of government deficit or borrowing even in order-of-magnitude terms. They have only some vague, and well-founded, sense that both deficit and borrowing are too high. The much smaller number of people who follow these numbers closely know that games are being played and can look for substance.
And yet, financial markets are home to a community of the semi-informed; people who know a little, but not too much; who give attention to numbers but lack ability or inclination to ask pertinent questions about them. These were the analysts who puffed Enron, for example, or who rated complex debt securities. But such errors could not continue indefinitely; the discipline of cash ultimately overtakes companies, debtors and even governments.
Anyone who relies on the verdicts of these semi-informed observers does so at their own peril – as the fate of those who succumbed to Enron’s puffs showed. But the depressing reality of modern politics is that today’s headline takes priority over tomorrow’s analysis or next year’s outcome. When I began my career in economic research in Britain, I had confidence that whatever rhetorical flourishes politicians might use, the statistical information that accompanied government pronouncements was reliable. I no longer think that: not because – as in Argentina – the data is fabricated, but because the presentation of figures is selective, because legitimate areas of judgment, where different views could be properly taken, are often resolved in a biased fashion, and because – as with the Royal Mail pension fund – technical loopholes are exploited to give inappropriately favourable impressions.
Transparent accounting devices, such as the recategorisation of interest receipts by the Asset Protection Scheme for bailed-out UK banks, may be less damaging than manipulations that involve actual changes in behaviour and therefore impose economic costs. Taxpayers have spent billions of pounds in interest costs through the private finance initiative to enable tens of billions of pounds to be taken off the government balance sheet – money that should have been spent on the schools and hospitals.
When in opposition, the present government acknowledged the issues and committed itself to clarity and openness in presentation. But it seems the exigencies of office have proved too demanding. Why lose weight when you can reset the scales?
Copyright The Financial Times 2013.