Government in a pickle over the financial message

One of this week’s more amusing media stories involved the response of the UK Statistics Authority (UKSA) to David Cameron’s gaffe when he told his audience in a party political broadcast that the Government was ‘paying down Britain’s debt’.

The public spending deficit – and hence the UK’s borrowing requirement - is still at historically high levels, so Britain’s debt, far from being ‘paid down’ is still climbing at an eye- wateringly unsustainable rate.

The UKSA received a request for clarification from the Labour Party after the broadcast and Chair Andrew Dilnot publicly wrote back to explain the difference between debt and deficit, copying in Downing Street for good measure. 

The PM’s words were especially surprising when you consider that actually the growing debt problem is something the Government should want people to know about, because it is the justification for the Government’s approach to the economy.   Having heard Cameron’s words people may have been entitled to ask, ‘So if debt is shrinking  then why austerity?’ Can’t we find money for more public spending out of all that debt interest we must be saving?’

It is highly unlikely that the Prime Minister would have deliberately misled in such a way because he was bound to get caught out.  Much more likely is that this is evidence of disorganisation at the heart of Government.  Who in the Prime Minister’s office should have more carefully proof read the copy?

For those of us who make our living in public finance,  however, this is not the first time we will have run across such confusion.

Take, for example, Secretary of State for Communities and Local Government Eric Pickles’ regular forays into the field of local government finance.   One of his common confusions is over the nature and role of Council reserves.  

He reportedly described a particular authority as having ‘£105 million in the bank’, meaning that it had reserves on its balance sheet of £105 million.   Now perhaps it takes a bit of expertise to know that these two things are not necessarily the same, but it is expertise that CLG does have if Pickles chooses to consult it.

Slightly more serious is Pickles serial confusion about the fact that it is sensible policy to keep reserves handy – in his terms ‘money in the bank’- when the cold winds of austerity and uncertainty are blowing.  Many thousands, perhaps millions, of householders have taken that view since the recession kicked in, which is why personal savings have grown over recent years despite the execrable rates of interest available.   

Even setting aside the need to manage risk, local authorities need to use their balances to manage downsizing on an unprecedented scale.  With budgets reducing by such large numbers you cannot necessary deliver savings  to balance off cuts in funding on a year by year basis.  Cuts may be applied one year while savings are delivered in another,and it is the reserves that provide the cushion.

But Pickles’ worst financial heterodoxy, that Council’s are ‘scaremongering’  when they talk about cuts while keeping hold of reserves, is about something that even a ten year old managing his pocket money can see through.  In order to keep spending on services – let say the amount is £1 million - you need to have the money this year, and then you need another £1m next year and another £1m the year after that, and so on. Spend your reserves now and you don’t have them to spend again.   Spending the reserves does no more than put off the inevitable, and does it in a way that leaves you seriously exposed if anything goes wrong.

But unless I appear to have a downer on politicians – heaven forbid – there is another group which not infrequently get the finances wrong and should know better.  The media.

Take the difference between funding and financing, which confuses journalists all the time.   A fairly clear example was the report that the government was thinking of allowing local authority pension funds to be used to ‘fund’ public infrastructure projects.  When talking about the Pension Fund the clue is in the title …. it funds pensions.   Of course, while it is sitting waiting to fund pensions, the cash is used to finance other investments for a return, some of which may include public infrastructure, who knows?   But just as reserves cannot be used twice, neither can the pension pot.

You may think this is just about a public finance professional getting grumpy about the misuse of terminology,  but confusion about finance is rife and the distinctions are important.  I don’t think politicians and the media are necessarily setting out to mislead people, but the slack use of terminology and the failure always to explain don’t help. And we also know that some of the World’s current economic ills are caused by spending money we didn’t have, so statements that suggest the use and reuse of the same money for different purposes is acceptable risk perpetuating an egregious error.   

Some politicians are better than others of course, and some journalists make it their business to be very precise and explain clearly the financial implications of stories.  Evan Davies of the BBC deserves honourable mention.   But when politicians and journalists make mistakes, experts in the public service, who are sometimes loathe to get involved in a political argument, do need to intervene more often and clarify.   More power to Andrew Dilnot’s elbow.