Darling’s £32bn ruse

Chancellor Alistair Darling plans to sweep £32bn of debt out of public view,
using accounting practices which paint a rosy picture of government finances.

In July, Darling stated: “We do have to tell people the lie of the land,” but
next year he will preside over a two-tiered accounting regime which will gloss
over the real level of debt, according to a former Treasury adviser.

David Heald, who until July was a member of the Treasury’s Financial
Reporting Advisory Board, has co-authored a study which predicts a £32bn gap
between internal and externally reported government figures. According to
Heald’s study, 87% of public/private partnerships and private finance
initiatives will be left off the government’s books, based on 2007 numbers.

Externally, the government will report to the UK public using rules viewed by
experts as “unsuited” for representing PPPs and PFIs.

This will effectively keep £32bn of debt hidden from the public eye.
Internally, it will report under modern international financial reporting
standards, which will keep PPPs and PFIs on the books. “These are two accounting
systems which diverge,” Heald said.

External figures, reported through the Office of National Statistics, will
use Eurostat rules, required by the European Commission for the compilation of
statistics. IFRS, however, is used by listed companies in more than 100
countries around the world.

“In this particular issue [on accounting for PPPs and PFIs] IFRS gets it
right and Eurostat gets it wrong,” said Heald.

“The UK has to be able to report [to the commission] on an agreed national
accounts definition, but it can use for its internal political debates whatever
numbers it chooses.”

Critically, the government plans to base its borrowing targets on the softer
of the two standards. The government’s decision to move to IFRS, announced by
then chancellor Gordon Brown in March 2007, was welcomed as a bold step towards
a more robust reporting standard. A vast range of assets fall within PPP
schemes, including prisons, schools and hospitals.

A Treasury spokesman said it was the ONS’s decision which figures were
publicly available. “Fiscal policy is based on national accounts measures and
therefore the budgets set for departments also follow the national accounts,” he
said.

However, Heald added that the government could opt to use the internal IFRS
figures if it chose to.

AminMawji, partner in Ernst & Young’s financial accounting advisory
service, said there was confusion in the profession over what rules the
government would use to set borrowing limits.

“Will the [government] link its borrowing limits based on IFRS or some other
method of accounting?” he asked.