Wednesday, 27 September 2017

When is a loan not a loan?

The reaction from some quarters to Labour’s proposal to bring PFI deals back ‘in-house’ has been to claim that this would be very expensive, and would require a Labour Government to borrow money in order to buy out the PFI contracts.  The problem with that line of attack is that it assumes that the money involved in PFI deals wasn’t borrowed in the first place, and that is a contentious argument to say the least.
What is the difference between the government directly borrowing money to build a hospital and paying it back over, say, 40 years, and the private sector borrowing money to build that same hospital while the government pay a service charge over the same period and then take ownership of the hospital at the end of that period?  The difference is just a question of accountancy or ‘financial engineering’; effectively the government is borrowing in both cases but treating one type of loan as an ‘off-balance-sheet’ arrangement.  When private companies use off-balance-sheet arrangements, they are often accused of hiding the true state of their indebtedness.  That seems like fair comment to me, and it is equally true when it comes to the government.
The point is that the government already owes the money to pay for PFI deals; it merely pretends that it doesn’t so that it doesn’t have to count the total amount due in its debts.  Any proper due diligence exercise on HM Government’s accounts would, as a result, conclude that it owes a great deal more than its accounts show.  The question therefore, when it comes to terminating PFI contracts early, is not whether the government needs to borrow new money to buy them out, it’s whether borrowing from a different lender at a better rate might be a cheaper (and more honest) way of financing the same debt.  And given the exorbitant effective interest rates being charged on some PFI contracts, and the record low level of interest on new government debt, it’s hard to believe than buying out PFI deals at a fair rate based on normal accounting treatment of the value of future payments won’t be far cheaper than letting them run.
The real question to Corbyn and McDonnell is not ‘how will you pay for this?’, but ‘why did it take you so long to figure this out?’  The latter question gives me far more concerns about their financial acuity than the former; but it puts them way ahead of the Tories who still haven’t been able to figure it out.

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