A couple of years ago, in an IEA paper, I suggested that the UK’s public debt was many times larger than the official figure. Following the financial crisis, I recalculated my estimate and subsequently the official figure, published by the Office of National Statistics (ONS), has changed significantly. In addition, two other organisations, the TaxPayers’ Alliance (TPA) and the Centre for Policy Studies (CPS), have published their own estimates. The various studies have produced very different figures, leading to confusion. The purpose of this note is to clarify the situation.
The differences between the figures are caused by a disagreement about what should be included, not by the actual calculation of the numbers. I therefore set out below the different liability figures, along with the major items they include.
ONS: £2,252bn (official debt, bank liabilities)
IEA: £4,771bn (official debt, public sector pensions, state pensions)
TPA: £7,873bn (official debt, bank liabilities, public sector pensions, state pensions)
CPS: £3,617bn (official debt, bank liabilities, public sector pensions)
There are further differences, including the treatment of PFI and Network Rail, but these are relatively minor so I am ignoring them for simplicity.
My calculation (IEA) is an attempt to provide a realistic assessment of the country’s debt. All of the independent estimates include public sector pensions liabilities. The argument of why these should be included has been well rehearsed, and I refer the reader to Sir Humphrey’s Legacy by Neil Record.
I diverge from all the other calculations in ignoring the liabilities from RBS, Lloyds and Northern Rock. The ONS and others include the full liabilities of these banks. I do not believe this represents a realistic reflection of the country’s debt as it ignores the assets of these institutions which approximately balance out the liabilities. The banks could be sold next week and this liability would disappear. The government is ‘on the hook’ if some of the assets of those banks defaulted. However, the actuarial value of this is the product of the probability and the magnitude of the losses, a much smaller number than the full liability (I have estimated this smaller number in my calculation).
The final difference is that both my study and the TPA’s include an allowance for state pensions (i.e. basic state pensions and state second pensions). This is more controversial than including public sector pensions; the argument against including them is that pensions are paid out of future tax revenue and also that the government can change the level of these pensions. However, I strongly believe these are true liabilities of the state as people earn the entitlement to a pension through paying national insurance contributions. This makes state pensions different to a future spending commitment, such as future NHS spending. People have earned their pension from past contributions, so this is a debt on the government, whereas the NHS is more akin to an insurance policy which is paid for out of current NI contributions.