PFI switch raises tax-rise pressure

PRESSURE on Gordon Brown to raise taxes will increase when billions of pounds of investment undertaken through the Private Finance Initiative (PFI) is included in the official measure of public sector debt, City experts said today.

In a move that will highlight the sharp deterioration in public finances in recent years, the Office for National Statistics confirmed that part of the cost of PFI deals will be transferred to the Government's books.

This relates to the cost of loans from contractors, rather than the capital value of the projects as reports have suggested. The ONS said the amount of money involved was not yet known, nor the timing of the move.

Jonathan Loynes, an economist at Capital Economics, said: 'The upshot is that, while these changes do not transform the fiscal position, they add to already growing pressure for a period of fiscal consolidation over the next few years, probably incorporating both slower growth in public spending and tax increases, to get the public finances back on to a more sustainable footing.'

The value of PFI deals already signed is £43bn, with a further £12bn or so in the pipeline in the next couple of years. Some of the liabilities are currently 'off-balance sheet', an accounting advantage that has allowed public sector managers to secure big projects.

Reclassifying these liabilities 'on-balance sheet' would push public sector net debt closer to the 40% limit specified by the Chancellor's Sustainable Investment Rule. Net debt is already creeping higher, rising from 32.5% to 34.2% of gross domestic product over the past year.

Investec's Philip Shaw said: 'Most of the City's attention has been on the Golden Rule but if the Government continues to rack up debt, the Sustainable Investment Rule becomes more important because it would become a binding constraint on the Chancellor. A big increase would reinforce the need for fiscal consolidation in the longer run.'

The ONS today played down the significance of the changes. 'This is an ongoing process and the impression given in recent reports that the ONS is about to make material changes in no way captures the nature of this series of longer-term developments,' it said.

Nevertheless, economists said it highlighted the fact that PFI-related liabilities, as well as other off-balance sheet debts such as the Government's pension liabilities, have increased significantly in recent years.

Contractors' shares fight back

THE City shrugged off fears for the public sector contracting market as shares in quoted Private Finance Initiative firms recovered after a jittery opening in London trading, writes Robert Lea.

Reports that a move to classify billions of pounds of PFI expenditure as debt on the nation's finances spread worries that might mean an end to the Government-backed pipeline of contracts to build roads, hospitals and schools.

Shares in John Laing, which has restructured itself from a construction company into a specialist PFI investor and project manager, were the worst hit, initially slumping more than 5% before recovering to trade at 235½p, down 6¼p.

Carillion, one of the largest PFI contractors and holding big contracts with the Ministry of Defence, and Serco, one of the Government's favourite outsourcing companies, saw their shares down by around 2% after earlier steeper falls.

Charlie Cottom, sector analyst at Panmure Gordon, said: 'We do not believe this would be the end of PFI since there are good commercial reasons why the Government undertakes PFI - it is not just to keep debt off-balance-sheet.

'The Government does believe public-private partnerships offer value for money as they guarantee the construction costs, whereas the Government's experience of other construction projects has been of frequent cost overruns.'

p>Meanwhile, the new financial year got off to a rocky start, with money in the Treasury's coffers down almost 30% on a year ago. Official figures showed the public finances £1.6bn in the black in April, down from £2.2bn in the same month last year. Despite a rise in tax receipts, Government spending, soared by nearly 7%.

Economists said the public finances were set to deteriorate as the economy slows. 'This slower growth will increasingly limit tax receipts as the fiscal year progresses,' said Howard Archer at Global Insight.

The Treasury preferred to focus on the alternative accruals-based measure which showed net borrowing falling to £1.3bn from £2.7bn a year ago. 'Today's figures show we are continuing to meet our fiscal rules,' a spokesman said.