(Part 1 was published here yesterday)
Exactly how much public debt has been run up through PFI and PPP financed projects is uncertain because of the length of the contracts which commonly have renegotiation clauses at various points built into them and the habit PPP and PFI contractors have of presenting public bodies with demands for more favourable terms, failing the granting of which they will walk away from the contract. But if exact figures cannot be arrived at, ballpark figures can. In 2010 the NHS Health Direct website carried an article that estimated that the cost of PFI contracts entered into since Labour came to power in 1997 was probably in the region of £300 billion. To put that in context, the National Debt when Labour came to power, which had been accumulated over 300 years, was £352 billion. The large majority of the PFI/PPP cost s do not figure in the official National Debt.
The failure of the Blair and Brown governments to behave sensibly and honestly during the boom years resulted, after Lehmann’s collapse in 2008, in a very rapid deterioration of the public finances with a deficit of £68 billion in 2008 (in itself a frightening figure) turning into one of £152 billion a year later. Amongst the Government’s responses to the deteriorating financial situation was, unbelievably you may think, to keep pushing new PFI projects forward on the grounds that this would help keep aggregate demand up. The problem was that credit suddenly became much more expensive so the cost of the that the PFI contracts rose. However, because PFI costs were kept largely off the books Enron-style, this suited the Brown Government because it meant that expenditure could be kept up without it being added to the official National Debt.
The failure of regulation
The overspending and dishonest accounting was dangerous and damaging in itself, but it was made unreservedly toxic by the failure of Blair and Brown to control both the growth in credit and prevent the development use of ever more exotic and removed from reality financial vehicles of the derivatives variety such as Collateralised Debt Obligations (CDO) and Credit Default Swaps (CDS).
Margaret Thatcher abolished credit controls in the 1980s. Blair and Brown not only failed to reinstate them, but positively celebrated the surging growth in credit from credits cards, bank loans and, most of all, mortgages. Banks showered their customers with offers of credit cards and bank loans; mortgage providers allowed multiples of earnings of four, five and even six times earnings and 100% mortgages . In the last few years before Lehmann’s collapse in 2008 mortgage providers were offering more than the value of the property with 105%, 110% and finally 125% mortgages in the manic belief that house prices would continue rapidly upwards forever and wipe out the negative equity in the property on which they had loaned more than the property was currently worth.
Just to make the debt pie really sticky, those granting mortgages and other credit allowed the borrowers to self-certify their earnings and applications for credit cards and bank loans were passed without any meaningful check on what were the borrowers’ financial circumstances. This resulted in a good deal of mortgage fraud, people running up massive credit card debts using ten, twenty or even more cards and large numbers of people (especially those who bought in the last year or two of the housing bubble) with mortgages far too large for them to service comfortably even when house prices were rising and re-mortgaging at a reasonable rate easy, mortgages which became utterly beyond them when the crash came.
Blair and Brown added to the domestic economic debt and house inflation jubilee by allowing immigration to get out of hand. In their 13 years in Government Labour allowed net migration into Britain estimated at 3 million. This massive influx coupled with the ease of mortgages (which foreigners could obtain as readily as native Britons) poured much inflationary oil on the housing price waters and almost certainly substantially drove up credit card debt as well.
If Blair and Brown had done no more than introduce credit controls which restricted mortgages by insisting on a reasonable deposit – say fifteen per cent – allowed a mortgage of no more than three times salary, banned self-certification of earnings and insisted on proper verification of the borrower’s general financial circumstances, much of the debt poison would have been avoided. Even with massive amounts of immigration, house prices would have remained lower because there was less credit chasing them. Lower house prices would have reduced the amount of credit generated by people taking out second mortgages to spend on things other than their property and made people less inclined to take out other forms of debt because they would not have felt as giddily rich as they did in the over-heated house price years running up to 2008.
To the vast indebtedness created by New Labour spending must be added the financial fall out of the banking crisis. This was the consequence of criminally lax regulation. The Blair/Brown Governments started the process of pumping vast amounts of public money into the banks with the effective failure of Northern Rock in September 2007, its nationalisation in 2008 and the partial nationalisation in 2008 of Royal Bank of Scotland and what became the Lloyds Group after Lloyds TSB had its arm twisted by the Government to take over Halifax Bank of Scotland. There were also been one or two smaller interventions such as those involving the Dunfermline Building Society and the Bradford and Bingley (a building society converted into a bank). In theory, all the money used to rescue these financial businesses will be recovered eventually when the government sells its stake in the banks. However, the “in theory” is a very live issue because if the shares were sold now it would be at a very substantial loss and there is no prospect of the shares doing anything but remain stagnant at best for the foreseeable future because of the continuing global financial woes in general and the plight of the Euro in particular.
(The concluding Part 3 will be published here tomorrow)