Recent alarm about the level of debt held by Network Rail has highlighted how the Treasury’s archaic fiscal rules put artificial restrictions on the UK’s infrastructure investment.
There were concerns last week over debt levels at Network Rail, the owner of the UK’s train stations, tracks, signalling and tunnels.
The irony is that Network Rail is classified as a private corporation by the Office of National Statistics, so in theory its £27bn borrowing shouldn’t trouble the Treasury as it doesn’t add to public sector debt. Yet at the same time there is a big contingent liability there that would be invoked if it went bust. And of course its predecessor, Railtrack, did just that.
The previous government bent over backwards to keep Network Rail’s debt off the books, and was criticised at the time for the unaccountable structure it created, in which the company is largely owned by self-appointed members. This became news again this year when Justine Greening, the current Transport Secretary, admitted she was unable to veto its directors’ bonuses (although the directors later decided to waive them).
And the anomalies don’t end there. In the same sector, London and Continental Railways and GNER are classified as public corporations and the company that will build the new high-speed line (High Speed 2) is actually part of central government. Yet High Speed 1 (owner of the tunnel link) is now a private company.
ONS classification rules simply interpret the European System of Accounts, and it would be wrong to blame it for this confusing situation. The mishmash results of course from the Treasury’s fiscal rules. Instead of reviewing these rules and bringing them into line with the ones that operate in the rest of Europe, the Treasury’s one-off attempts to get round them result in curious entities like Network Rail.
As Professor Steve Wilcox from the University of York makes clear in the latest UK Housing Review briefing paper, the problems do not stop there.
For one thing, other European governments don’t hamstring their public transport companies in the same way, which is why Arriva, whose parent company is majority-owned by the German government, runs such a large proportion of British rail and bus services. Similar British companies (like GNER) simply wouldn’t be allowed to raise the capital that might allow them to compete.
But the main problem is that, just at the moment when public corporations of different kinds could be raising capital and investing to stimulate the economy, unlike their equivalents in continental Europe, they can’t do so because any borrowing will fall foul of Treasury rules.
The irony is particularly marked in the housing sector. Private developers are moribund, housing associations’ borrowing is stretched to its limits yet council housing (which is classified as part of the public corporate sector) can’t borrow beyond the caps imposed by the Treasury even though many councils would like to do so and borrowing rates are very favourable.
Last year four councils, led by Westminster, attempted to persuade the Treasury to change the rules and free up council housing (and other) investment. The Treasury’s main objectives were twofold. One was that the government would need to step in if a public corporation went belly up. The other was that such a move would undermine the credibility of the government’s fiscal plans.
In fact, neither of these holds up. First, while it is true that the government effectively underpins the public corporations that it owns, it also underpins a good many other bodies that are too big to fail, as we have seen with the banks and would no doubt apply to services such as water and gas and – of course – to Network Rail. Many of these bodies are in the private sector (or were, until the government acquired them). And the underpinning argument applies equally in France and Germany, but they don’t seem to have a problem about it.
The second argument about Britain’s standing is also difficult to sustain given that all that is being suggested is the use of international rules that are already being followed by most other countries, the International Monetary Fund, the Organisation for Economic Co-operation and Development and the credit rating agencies. On the measure that they already use (general government debt), Britain’s standing would be unchanged.
It is difficult not to conclude that the Treasury’s stance results from its aversion to anything that smacks of public sector-led investment. In housing, as in other sectors, this is holding back investment that could not only help to stimulate the economy but would also begin to meet some very pressing national needs.
Original post and comments: Public Finance