This a pre-released chapter from the forthcoming IFS Green Budget 2017. The IFS Green Budget publication, produced in association with ICAEW and with funding from the Nuffield Foundation, will examine the issues and challenges facing Chancellor Philip Hammond as he prepares for his Budget in March. This will be launched at an event at 10:00 on Tuesday 7 February.
Decisions have consequences. Many of those consequences are financial.
For example, billions of pounds are needed to decommission nuclear facilities as a consequence of decisions made by governments from the 1950s onwards. Decisions made by successive governments to borrow to fund cash spending have resulted in the build-up of substantial debts. And growing levels of pension obligations have arisen as a consequence of decisions to offer defined benefit pensions to public sector employees. The Whole of Government Accounts (WGA) provide a way of reporting on the financial consequences of decisions, in particular by reporting on the assets created or the liabilities incurred each financial year by public bodies across the UK. This chapter focuses on the latter, the £3.6 trillion of accumulated public sector liabilities (equivalent to 191% of one year’s GDP) reported in the 2014–15 WGA and the decisions that have led to them.
The Whole of Government Accounts reflect the financial consequences of decisions made by successive governments, in particular in the increasing level of liabilities being recorded.
Total liabilities of £3.6 trillion (191% of GDP) were reported at 31 March 2015, almost two-and-a-half times the narrower measure of public sector net debt reported in the National Accounts of £1.5 trillion (or 83% of GDP).
The effectiveness of the Whole of Government Accounts as a tool to support good public financial management would be improved by a better commentary and by more timely preparation.
The Whole of Government Accounts are a world-leading development in public sector financial reporting, but progress is needed to reduce the 14 months taken to produce them and to improve narrative disclosures to the standards expected of listed companies.
The focus on reducing the ‘near cash’ fiscal deficit measure in the National Accounts risks less attention being given to controlling costs incurred that will be settled in the longer term.
The 38% reduction in the fiscal deficit over the five years to 2014–15 was not matched by the 19% reduction in accounting deficit over the same period, a significant divergence from the government narrative about the public finances.
After debt, the most significant liabilities are for public sector pension entitlements. Decisions made to provide defined benefit pensions to employees have exposed the public sector to significant economic and demographic risks, in particular to unanticipated increases in longevity.
Public sector unfunded pension liabilities amounted to £1.4 trillion at 31 March 2015, up by £354 billion since 2010. Local authority and other funded pension scheme liabilities of £377 billion were supported by investments of £257 billion, with investment growth offsetting most of the increase in liabilities since 2010.
Better information is needed to allow decision-makers to choose between spending today and increasing long-term liabilities, such as deciding whether to invest in addressing medical failures versus the cost of clinical negligence claims.
Liabilities for nuclear decommissioning, clinical negligence and the Pension Protection Fund continue to rise, with long-term liabilities up to £175 billion at 31 March 2015. These are obligations to pay cash in the future, reducing the amount available in future for other priorities.