THE VAGARIES of UK accounting should not deter the government from creating a state-backed investment bank, despite the likelihood that it would cause the chancellor to miss his fiscal targets, a think tank has said.
The government's plan for a British investment Bank (BIB), announced by business secretary Vince Cable last week, will require £40bn of public funding and will also need to tap bond markets for up to £100bn if it is to successfully boost lending, the Institute for Public Policy Research (IPPR) has said in a report.
The IPPR also suggested that the chancellor change accounting rules to keep loans off the country's balance sheet, or risk missing his fiscal targets.
As the bank will be part of the public sector, its financial liabilities – the money it raises in capital markets through bond issuance – would be counted towards public sector net debt but the bulk of its assets would not be netted off. Only liquid assets are taken into account in the calculation of net debt.
The creation of a BIB would lead to a substantial increase in public sector net debt as currently measured, the IPPR said.
"Such a bank would require an initial injection of government capital which – on the existing accounting rules – would make it even less likely that the chancellor would meet his fiscal targets," Tony Dolphin, IPPR chief economist, said.
According to the IPPR, the self-financing activities of the state-backed bank should be excluded from the calculation of public sector debt and borrowing, on the same grounds that temporary financial interventions are now excluded. Another would be to switch the focus of fiscal policy away from public sector measures in favour of general government measures.
"A fully-fledged British investment bank should not be held back by the vagaries of the UK's accounting practices. Its self-financing activities should be excluded from the government's target fiscal measures and it should be free to raise funds on capital markets," said Dolphin.
the ONS / EUROSTAT will determine the treatment of the debt along with the credit rating agencies and the capital markets; not the IASB or the Chancellor.
Posted by: Nigel, 21 Sep 2012 | 15:23
How does this make any real sense? By simply not reporting them, these liabilities will not go away and the answer to the question "who's on the hook?" must be: the taxpayer.
I may not like the fact that my creditors exceed my debtors but I don't think my auditors will like me simply deciding I'd rather not report them.
Posted by: Duncan, 24 Sep 2012 | 11:59
It is the SME (small etc) type businesses that are said to need this new bank most of all. Traditionally they have raised funds through bank borrowing because they don't have credit ratings.
Does this mean that the new BIB will be hiring the credit analysts that currently work (or did until recently work) at high street banks? And will politicians be involved in credit decisions, either by individual loan or through lending targets?
Posted by: Paul 2, 25 Sep 2012 | 17:08
Has not off balance sheet financing led to enough problems already?
Posted by: Ian, 26 Sep 2012 | 01:21
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