Macroeconomics, the economy, inflation etc. *likely to be very dull*
Comments
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Well that's a thorny dilemma then isn't it? Per the IMF you shouldn't raise taxes or cut spending. Per the markets, you may not be able to borrow or only borrow at ruinous costs. What do you do?rick_chasey said:
FWIW IMF study doesn’t rate tax rises either.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.0 -
So you can cut spending in benign economic conditions (so not in the middle of the Great Recession and the subsequent European sovereign debt crisis), go through debt restructure (not relevant).
You can lower interest rates, but not if it creates a lot of inflation, which is another tool but not one they recommend.
Should add if you read it it doesn’t offer many solutions, but more says what has historically worked or not.
Growth is really the best way and that is what sinks governments, but clearly that is elusive in some instances.
Badly timed austerity does harm future growth possibilities because people get more ill, die sooner, are less educated, more inequality etc, so good to avoid doing that!0 -
Yes I do. Since Blair we have developed a mentality of borrowing as much money as possible.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools. Supposing that had been put into reducing debt rather than education: do you really think things would be any different now?surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
If you want to fix school roofs why does borrowing have to be the only option?
Why not switch spending?0 -
surrey_commuter said:
Yes I do. Since Blair we have developed a mentality of borrowing as much money as possible.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools. Supposing that had been put into reducing debt rather than education: do you really think things would be any different now?surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
If you want to fix school roofs why does borrowing have to be the only option?
Why not switch spending?NHS hospital trusts are being crippled by the private finance initiative and will have to make another £55bn in payments by the time the last contract ends in 2050, a report reveals.An initial £13bn of private sector-funded investment in new hospitals will end up costing the NHS in England a staggering £80bn by the time all contracts come to an end, the IPPR thinktank has found.This article was amended on 12 September 2019 because an earlier version incorrectly stated that PFI was introduced under Blair’s Labour government. The scheme began under John Major’s Conservative government but its use proliferated in the Blair era.
https://www.theguardian.com/politics/2019/sep/12/nhs-hospital-trusts-to-pay-out-further-55bn-under-pfi-scheme
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I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.1985 Mercian King of Mercia - work in progress (Hah! Who am I kidding?)
Pinnacle Monzonite
Part of the anti-growth coalition0 -
Problem with this argument is that the UK's growth during the "austerity" era was quite good, per ONS: https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ihyq/qnarick_chasey said:Growth is really the best way and that is what sinks governments, but clearly that is elusive in some instances
2010: +2.7%
2011: +0.6% not very good but our nearest export market - the EU, trade gravity and all that - was trying not to implode during this period due to Eurozone crisis
2012: +1.8%
2013: +2.2%
2014: +3.3%
2015: +2.1%
2016: +2.0%
2017: +2.3%
2018: +1.5%
2019: +1.3
So an average of circa +2% pa over a decade of evil Tory austerity.
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In the interests of balance, I agree (and have done several times already) that the social impacts of the austerity era were decidedly sub-optimal, even if they were as a result of a policy to reduce public spending in specific areas rather than as a result of real austerity.rick_chasey said:Badly timed austerity does harm future growth possibilities because people get more ill, die sooner, are less educated, more inequality etc, so good to avoid doing that!
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I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).0 -
wallace_and_gromit said:
I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).
No, I'm certainly not arguing in favour of PFI procurement.wallace_and_gromit said:
I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).1985 Mercian King of Mercia - work in progress (Hah! Who am I kidding?)
Pinnacle Monzonite
Part of the anti-growth coalition0 -
This is a prime example of short term thinking caused by 4/5 year election cycles.wallace_and_gromit said:
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Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
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"Look at what I achieved." To hell with the consequences.The above may be fact, or fiction, I may be serious, I may be jesting.
I am not sure. You have no chance.Veronese68 wrote:PB is the most sensible person on here.0 -
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I'd say it's bad if it costs £80bn to fund a £13bn investment.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
Alternatives are less funding elsewhere or increased taxes. Who'd be a politician?The above may be fact, or fiction, I may be serious, I may be jesting.
I am not sure. You have no chance.Veronese68 wrote:PB is the most sensible person on here.0 -
We've disagreed before on this subject, but this makes no sense. If you borrow some money to build a school, you need to pay the debt whether that is by PFI or whatever other magic borrowing device you are using.wallace_and_gromit said:
I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).0 -
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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It allows governments to pretend they aren't borrowing as much, and "the markets" to not pretend they care?TheBigBean said:
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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Presumably the lending conditions are pretty important in what value or not you have? Presumably raising private capital rather than raising gov't debt is more expensive and that can add to the overall cost?TheBigBean said:
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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It allows councils to pretend that they are not borrowing as much, because otherwise they get in trouble with the government. You could argue that any contract signed by the public sector is a debt. I'm not sure it is necessarily helpful especially when the big liability which is pensions is ignored.kingstongraham said:
It allows governments to pretend they aren't borrowing as much, and "the markets" to not pretend they care?TheBigBean said:
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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There is a relationship in borrowing between risk and cost. PFIs are lower risk to the investor, so it costs more to borrow. If the government simply borrowed everything with gilts and onlent at no cost, how do they cover the defaults?rick_chasey said:
Presumably the lending conditions are pretty important in what value or not you have? Presumably raising private capital rather than raising gov't debt is more expensive and that can add to the overall cost?TheBigBean said:
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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Yeah I don't know enough about it. I mean, couldn't just the gov't lend at a lower rate than rivals but still include some margin for risk? Just by the fact their cost of funding is so much lower? Or is that all PFI is anyway?0
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Most of the calculations tend to forget the 25 years of services being provided. Also, a lot e.g. NAO focus on value with hindsight. For example, insurances premiums turned out to be less expensive than thought at the time, so the public sector is, in the eyes of the NAO, paying too much for insurance. If premiums had gone up, they would be paying less.rick_chasey said:Cost to the taxpayer? Is it really that bad?
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ECAs and the like do exactly that, but it is subject to OECD rules around state subsidy if it is not done on a commercial basis. Even if it could be done, the savings would be trivial in the grand scheme of things. Construction costs have by far the biggest impact on the overall cost, and interest rates have a bigger impact on the overall financing costs. Note most PFIs were financed when long term interest rates were 5%, but margins were very very low such that all lenders made big losses in the financial crisis.rick_chasey said:Yeah I don't know enough about it. I mean, couldn't just the gov't lend at a lower rate than rivals but still include some margin for risk? Just by the fact their cost of funding is so much lower? Or is that all PFI is anyway?
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To steal SC's hobby horse you could do a huge amount with the money spent servicing our debt. If we didn't have debt we could use that money without having to borrow.0
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Sorry - I wasn't being particularly clear.TheBigBean said:
We've disagreed before on this subject, but this makes no sense. If you borrow some money to build a school, you need to pay the debt whether that is by PFI or whatever other magic borrowing device you are using.wallace_and_gromit said:
I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).
In a given year, assume the government's fiscal headroom (incorporating the impact of current borrowing on future debt service requirements) for discretionary investment is £Xm. If a schools costs £Xm then the government can borrow to fund one school.
This occurs for the next 2-3 years but then there is a major economic downturn and fiscal headroom is eliminated as tax revenues fall etc. Government can respond by stopping its school building campaign for a few years and then resuming once economic conditions are again favourable.
[Assume PFI costs are spread over 25 years.]
If you build a school via PFI, then the cost of the government in Year 1 is £Xm / 25.
So the politicians think "With this year's fiscal headroom of £Xm we can commit to building 25 new schools as it will only cost £Xm this year" so that's what they do, as it popular and makes them feel good and next year is another problem.
For the next 2-3 years, the government uses £Xm of its borrowing capacity to pay 25 lots of £Xm / 25 annual charge for the PFI schools.
Major economic downturn hits, government now has zero fiscal headroom, but is still committed to paying £Xm per year for the schools and has to find some way of paying this, be it higher taxes or reduced spending elsewhere.
So the risk of PFI is that it encourages politicians to commit to higher spending than the economy can really afford over the long term, as they are seduced by cyclically favourable fiscal conditions and think they've abolished economic downturns due to their brilliance. The dull old "Pay As You Go" scheme keeps expenditure in line with what can sensibly afforded, given longer term economic realities.
If the government built also 25 schools in one year via the PAYG approach then the argument would boil down to the relative efficiency of PFI schemes vs government managed schemes.0 -
Are you saying that effectively they insured up from for 25 years and are then forking out interest on that premium?TheBigBean said:
Most of the calculations tend to forget the 25 years of services being provided. Also, a lot e.g. NAO focus on value with hindsight. For example, insurances premiums turned out to be less expensive than thought at the time, so the public sector is, in the eyes of the NAO, paying too much for insurance. If premiums had gone up, they would be paying less.rick_chasey said:Cost to the taxpayer? Is it really that bad?
If so that's a crazy thing to have done. You have no idea whether the insurer will be around in 5 years time let alone 25 for starters.
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Why would the government on-lend if it was borrowing to directly fund the build of a hospital for its own NHS? Surely the argument in favour of PFI is that the project company's additional debt costs are more than offset by its private sector efficiency relative to the government managing the project itself where it would be paying contractors directly rather than paying a project company to pay contractors.TheBigBean said:
There is a relationship in borrowing between risk and cost. PFIs are lower risk to the investor, so it costs more to borrow. If the government simply borrowed everything with gilts and onlent at no cost, how do they cover the defaults?rick_chasey said:
Presumably the lending conditions are pretty important in what value or not you have? Presumably raising private capital rather than raising gov't debt is more expensive and that can add to the overall cost?TheBigBean said:
No, and no. There's a reason it has been exported around the world.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
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If those figures are correct, and my maths is right, that works out at over 7.5% pa interest over 25 years.pblakeney said:
I'd say it's bad if it costs £80bn to fund a £13bn investment.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
Alternatives are less funding elsewhere or increased taxes. Who'd be a politician?
That said, given what the Bean says, some of the £80 bn might be providing ongoing services, but then again, who on earth would sign a company up to provide a service over 25 years.
Look at what happened with Carilion with all their lucrative Government contracts.0 -
Remember Gordon boasted that he had ended boom and bust.....wallace_and_gromit said:
Sorry - I wasn't being particularly clear.TheBigBean said:
We've disagreed before on this subject, but this makes no sense. If you borrow some money to build a school, you need to pay the debt whether that is by PFI or whatever other magic borrowing device you are using.wallace_and_gromit said:
I agree it's not easy. That's why I'm an accountant rather than a politician!rjsterry said:
I think people forget just how many schools were repaired and new schools built in that period. Of course the money could have been spent elsewhere but it feels like that is mostly robbing Peter to pay Paul. A few more libraries are open; a few more schools are falling apart and overcrowded.wallace_and_gromit said:
2002-2007 spring to mind. Whilst there was lots of leaking roofs fixed in this period, this was via PFI, which defers the impact on public finances many years into the future.rjsterry said:
To what sunny period are you referring and which roof do you think should have been fixed? The last one I can think of we almost literally fixed the leaking roofs of schools.surrey_commuter said:
and yet we spent £120bn on debt servicing costs last yearrick_chasey said:
Sure, but in the context of "Britain has run out of money in 2010 so austerity was the only policy choice", I'm arguing that by many standards that plainly wasn't the case.Pross said:All that graph tells me is that debt to GDP had started rising sharply around the time of the GFC and that it got back under control as austerity was introduced.
Later on the debt/gdp ratio was even higher and the cost of servicing was lower, and historically the burden had been even higher still.
imagine how much rosier everything would look if successive Govts had not reset the fiscal rules so they could justify borrowing ever higher amounts instead of fixing the roof when the sun was shining
Had fewer PFI contracts been entered into, then post-GFC, we'd have had leakier roofs in schools etc. but with more flexibility to address the social issues resulting from the GFC, without sustained historically high levels of borrowing.
Similarly, whilst all the other stuff Labour invested in was likely "good" the more marginal stuff might have been better left uninvested in as this would have freed up fiscal headroom for direct action post-GFC.
FWIW, I think the problem with "austerity" in the UK was that it was too focused on cutting spending in unsexy but vital areas (e.g. libraries and early years education) rather than biting the bullet and raising taxes. The latter approach spreads the pain, whereas a lot of Coalition spending cuts were disproportionately focused on a relatively small number of people. And some of the cuts e.g. the Overseas Aid budget were probably counter-productive in that they saved little money, but at a lot of cost in terms of reputational damage and/or stirring social unrest.
Though I think it's fair to criticise the New Labour regime for thinking too much about the benefits of PFI schemes and not enough about the downsides namely the impossible to get out contracts with long term, large payments involved.
If you simply borrow in full to fund each new school etc. then when times are hard, you can stop building new ones and hence stop borrowing. Under PFI, the die was long-since cast re the future levels of expenditure (and hence borrowing requirements).
In a given year, assume the government's fiscal headroom (incorporating the impact of current borrowing on future debt service requirements) for discretionary investment is £Xm. If a schools costs £Xm then the government can borrow to fund one school.
This occurs for the next 2-3 years but then there is a major economic downturn and fiscal headroom is eliminated as tax revenues fall etc. Government can respond by stopping its school building campaign for a few years and then resuming once economic conditions are again favourable.
[Assume PFI costs are spread over 25 years.]
If you build a school via PFI, then the cost of the government in Year 1 is £Xm / 25.
So the politicians think "With this year's fiscal headroom of £Xm we can commit to building 25 new schools as it will only cost £Xm this year" so that's what they do, as it popular and makes them feel good and next year is another problem.
For the next 2-3 years, the government uses £Xm of its borrowing capacity to pay 25 lots of £Xm / 25 annual charge for the PFI schools.
Major economic downturn hits, government now has zero fiscal headroom, but is still committed to paying £Xm per year for the schools and has to find some way of paying this, be it higher taxes or reduced spending elsewhere.
So the risk of PFI is that it encourages politicians to commit to higher spending than the economy can really afford over the long term, as they are seduced by cyclically favourable fiscal conditions and think they've abolished economic downturns due to their brilliance. The dull old "Pay As You Go" scheme keeps expenditure in line with what can sensibly afforded, given longer term economic realities.
If the government built also 25 schools in one year via the PAYG approach then the argument would boil down to the relative efficiency of PFI schemes vs government managed schemes.0 -
Carillion was run by a bunch of half crooks. You can put some of the blame at the gov't vetting process, but let's not pretend it was the gov't fault they were dodgy.Dorset_Boy said:
If those figures are correct, and my maths is right, that works out at over 7.5% pa interest over 25 years.pblakeney said:
I'd say it's bad if it costs £80bn to fund a £13bn investment.rick_chasey said:Honest question, was PFI really that bad, and was it worse than the alternative?
Alternatives are less funding elsewhere or increased taxes. Who'd be a politician?
That said, given what the Bean says, some of the £80 bn might be providing ongoing services, but then again, who on earth would sign a company up to provide a service over 25 years.
Look at what happened with Carilion with all their lucrative Government contracts.
It also points to one of my big bugbears, which is the absolute racket of the big 4 accounting firms. They are useless at the actual job of auditing and no-one else has the capacity to do it.
Contemptible. Whenever a business goes bust or is found to be fraudulent, you can *guarantee* one of the 4 have signed it off no problems.0 -
No, the private sector takes out the insurance annually, but prices this into the original PFI price.Dorset_Boy said:
Are you saying that effectively they insured up from for 25 years and are then forking out interest on that premium?TheBigBean said:
Most of the calculations tend to forget the 25 years of services being provided. Also, a lot e.g. NAO focus on value with hindsight. For example, insurances premiums turned out to be less expensive than thought at the time, so the public sector is, in the eyes of the NAO, paying too much for insurance. If premiums had gone up, they would be paying less.rick_chasey said:Cost to the taxpayer? Is it really that bad?
If so that's a crazy thing to have done. You have no idea whether the insurer will be around in 5 years time let alone 25 for starters.
For example, let's say in 2005 it cost £100k pa to insure a school. The private sector would look at that and realise they have no control over insurance premiums and include £130k pa in their budget when they agreed an overall price of XX with the public sector.
Roll forward 15 years and it turns out that insurance premiums in 2005 were at a historic high and it actually only cost £50k pa to insure the school. As a result, the private operator would profit from the difference in their budget and £50k, so £80k additional profit.
The NAO's take on this is that the public sector made a big mistake due to the now known decrease in premiums (£100k to £50k). In my view, this is just nonsense hindsight.
Where there is a more legitimate point is in the difference between the cost of £100k pa in 2005 and the amount budgeted (£150k). The private sector can't control or manage the risk around insurance premiums, so can't be competitive when pricing it long term. So if the private sector is to take the risk, the only choice they have is to include a contingency which means that the public sector is likely, overall, to end up paying more. However, it means that the public sector is not taking any risk on insurance either.
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