The government's decision to nationalise the assets of the Royal Mail pension fund while taking on all future liabilities is another example of accounting sleight-of-hand by an administration that really should know better. The pension fund assets will be used immediately to reduce the government's debt while the liabilities - made up of future pensions to workers - will no longer be funded and will have to be met by future generations of taxpayers.
These liabilities will, of course, be hidden from the government's accounts. Although, ostensibly, the assets will be used to pay down the debt, future Chancellors of the Exchequer will just see this action as creating more headroom for additional future borrowing. Indeed, in many senses, the action taken by the United Kingdom is similar to the widely-criticised actions taken by the Hungarian and Argentinean governments, when they nationalised private pension assets but gave members of those private schemes pay-as-you-go taxpayer-funded rights instead.
The numbers are quite large. According to the government's own figures, the liabilities are between £4bn and £10bn greater than the assets - which stand at £28bn. However, if valued properly, the liabilities would probably be over £20bn more than the assets. Government accounts will show a reduction in the government's national debt of £28bn whereas, in reality, the national debt – including the implicit parts of the national debt - will be increasing by over £20bn.
The £28bn that will be used to repay the debt represents about 3 per cent of the existing national debt and will represent around 30 per cent of the government's borrowing requirement in the year the transaction happens. Although the government claims that it will not be spending the £28bn raised from taking over the assets, the signs that future governments will not feel so constrained are already apparent. There are calls from backbenchers and leading industry figures to spend the money on infrastructure projects.
The government would not allow a private sector company to get away with such shoddy - indeed, underhand - accounting practices. It should not be using such practices itself. The administration has brushed away criticism by saying that accounting for government borrowing is a matter for the Office for National Statistics. This may be so, but the government itself sets the parameters within which the ONS works. It could require the ONS to account for government debt – implicit and explicit – properly.
As things stand - the increase in future pensions obligations represented by this debt will appear in some, barely noticed, figures that are published by the ONS. But, when the government faces the electorate in three years, it will claim that the national debt has been reduced by this £28bn. Whereas, in fact, the national debt has been increased as a result of this transaction. It should be remembered too that this is a government that promised to deal with the problem of public sector pensions. Not unreasonably – though mistakenly - the government rejected any element of funding for such schemes. However, to create an unfunded scheme from a scheme that has hitherto been funded and add further to already pre-existing government guarantees is deeply short-sighted.
The article can also be read here.