I wonder what would happen if our bank manager called us in because he was worried about our spending.  The Chancellor of the Exchequer of course has no bank manager in the way we do.  But he has a Treasury team, a Bank of England which pretends to independence and a free pass.  Surely these constraints guarantee fiscal probity?

But of course they do no such thing.  The Chancellor is the boss of the Treasury team, they report to him, they are his employees.  Moreover, fascinatingly, most of his staff are laymen in the field of finance as indeed he is himself.  Appointed by another layman for political advantage.  The Bank of England hierarchy are dependent upon his patronage.  He appoints the BoE Governor, negotiates his salary, has the power to sack him and appoint another.  So fiscal strategy is in the hands of a political layman committed not to the financial wellbeing of the country but the re-election of his political party.  In a social and corporate welfare state there is periodical election where political parties compete to promise more financial goodies for the electorate.  This is paid for by more future taxation when the electoral heat is off, by borrowing or printing more money.

The new buzz phrase in the US is, ‘Infinite Horizon Fiscal Gap.’  Research economists like me love this kind of phraseology because we imagine it gives us status amongst mathematicians and physicists whose approbation we crave.  We are desperate to maintain economics as an exact science, nobody now believes us.  Why would they?

But in fairness this new concept takes us closer in government finance to international accounting standards than hitherto.  It has long been a criminal offence for corporate debt liabilities to be left off the balance sheet.  Pension liabilities being as we now understand the elephant in the corporate room.  Governments in the western democracies simply will never comply with the accounting requirements to which Marks and Spence or Sainsbury’s are obliged.

We never therefore know how our governments are committing our children or grandchildren.  In America there is a growing move by academics to try to establish this by, yes wait for it, estimating state liabilities in the distant future with the state’s ability to meet them.  the kind of bookkeeping every Yorkshire housewife has to do each month, but for politicians a frightening new concept.

What is left out of the annual chancellor’s statement?  The two monsters are public sector pensions magically left off the balance sheet, for which if it were UK Plc Ltd and he was the finance director he would go to prison for false accounting.  The second is Public Funding Initiatives.  (PFIs for those in the trade) These are more difficult to establish, but they are gargantuan.  Twenty year service contracts for the NHS and MOD abound as they do at local government level.  Lord knows what hopelessly incompetent deals have been done by naïve civil servants, local government officials and NHS managers with sharp suited wide boys from the private sector.  When I worked for an investment bank in the 90s we had an equity purchase programme based on public sector contracts.  It was and is a licence to print money.

So what is the real national debt?  What is the Infinite Horizon Fiscal Gap?  Well, it’s got so many noughts nobody reading this could conceive it.  I have been over forty years in financial services and I cannot understand it.  What does £4 trillion mean to you?  I lose the concept of money at about £1 billion.  Then I just go to the pub!

If you check that fount of all misinformation Wikipedia it shows national debt at 85% of GDP.  It is nothing of the kind.  With liabilities of PFI and public sector pensions it is much nearer 290%.  The Institute of Economic Affairs goes into significant detail for those who want to dig deeper, but the point is made.  Liabilities are growing faster than economic growth as public spending spirals out of control and ‘austerity’ remains a sham.

How can this be so?  Where is the ultimate protection in a democracy?  The press and TV?  With the noble exception of two journalists, Liam Halligan and Allister Heath, no so called financial journalists understand the numbers, they too are laymen.  There is also a heavy ‘don’t rock the boat’ culture in modern society, a medieval fear of the messenger being shot.

The horizon though is not infinite, expect the whole rotten edifice to crash and burn sooner than you think.

This article was originally published by Godfrey Bloom on: https://going-postal.com/2017/10/the-fiscal-gap-by-godfrey-bloo/

 


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