£511 BILLION IS THE TRUE DEFICIT FOR 2009-10
INTRODUCTION
The true accounting deficit of the UK government in 2009/10 was £511 billion and not the £156 billion shown as the Office for National Statistics [ONS] cash deficit.
The biggest omission by the ONS is the rising liability for the state pension which is not shown in either the cash deficit or in the Whole of Government Accounts.
However, this liability is real and would be compulsorily shown by law in the accounts of any commercial or non-profit organisation.
THE POLITICAL DEBATE
The political debate over ‘the deficit’ and ‘the debt’ is entirely focussed on the Office for National Statistics’ [ONS] cash figures.
This ONS ‘deficit’ is the difference in any given time period between Government Spending & Government Tax Take. Such difference is equal to Government Net Borrowing for the relevant time period.
The ‘debt’ is the total (cumulated over previous decades & centuries) amount of outstanding Government Debt at a given point in time.
The deficit, published every month by the ONS, totalled, in 2009/10, £156 billion for the year.
However, the ONS deficit is not what is understood as a true accounting deficit according to Generally Accepted Accounting Principles (GAAP), nor is it comparable to deficits as stated in the accounts of commercial, financial or non-profit organisations.
The true accounting deficit is much higher than the ONS deficit or the net additions to government borrowing on which so much attention is focussed.
Similarly, the true accounting ‘debt’ is the total of all government liabilities of which formal government debt is only a part.
Sustainable fiscal policy should be based on the true accounting deficit which reflects GAAP in the same way as any other organisation bases its finances on proper GAAP accounts.
CASH ACCOUNTING
The Office for National Statistics’ figure for the deficit is, in fact, a cash control figure, calculated by totalling cash received and cash paid out by the government. When cash paid out exceeds cash received, the shortfall has to be borrowed. Cash is paid out for current spending and capital spending. However, proper GAAP accounting clearly distinguishes current spending from capital spending which is not part of the fiscal accounting deficit.
Cash management is vital but it is not a picture of the true accounts.
The true accounting deficit, which is the financial guide to steer by, must include liabilities incurred but not paid out in cash in the accounting year but which add to liabilities and, therefore, future cash payments in future years.
Cash accounting can be correctly described as pre-medieval since the foundation of modern accounting was described in Summa Arithmetica published in 1494 by Fra. Luca Pacioli, friend of Leonardo da Vinci and co-author with him of a book on mathematics and drawing. Subsequently, accounting based on Pacioli spread throughout the world and became legally compulsory for commerce in the nineteenth century.
WHOLE OF GOVERNMENT ACCOUNTS (WGA)
However, the magnificent effort to produce and sustain Whole of Government Accounts [WGA] by the UK Treasury, the result of efforts going back to the 1990’s, and which produces proper, transparent and authentic accounts according to GAAP, means that, since 2009/10, there is now a much clearer picture of government accounts. The major weakness is that WGA accounts do not include certain off-balance sheet liabilities such as state pensions.
There are three major adjustments required to the ONS’s deficit which enable the true accounting deficit to be calculated. (There are other minor adjustments which have been ignored for the sake of simplicity.)
First, government capital expenditure less depreciation should be deducted from the ONS cash deficit since this expenditure creates assets which will be depreciated over many years in the future.
Second, there are costs which are included in the Whole of Government Accounts in its statement of Revenue and Expenditure for the year which are not yet paid out, principally public sector pension costs but also costs for PFI, nuclear decommissioning, etc. These are not included in the ONS deficit.
The WGA accounts clearly calculate these adjustments for the year 2009/10:
£ billion
ONS Total Cash Deficit 156
ONS Capital Expenditure less depreciation 49
ONS Current Deficit 107
Public Sector Pensions, Impairments, Provisions, etc. 58
(all non-cash items) [Note: this does not include actuarial revaluations of the public sector pension liability]
WGA Net Deficit for the year 165
____
The reconciliation of the difference between the WGA and ONS figures is laid out on page 26 of the WGA.
STATE PENSIONS
The third adjustment required is the increase in the liabilities during the year for accrued state pensions. These totalled £346 billion in the calendar year 2010 after deducting £69.4 billion actually paid out in the year and reflected in the ONS’s cash deficit figure. It should be noted that these figures were ‘clean’ in that there were no changes in discount rates in the year. However, they did include a sum of £33 billion due to a one-off uprating in liabilities for pensions by the coalition government. (Figures from Pensions in the National Accounts – a fuller picture of the UK’s funded and unfunded pension obligations – Sarah Levy, Office for National Statistics, April 2012)
These calculations for state pensions are based, quite correctly, on the accrued cost to date, the pension entitlement already incurred, which has increased during the accounting year.
(It should be noted that the state pensions liabilities are calculated on a calendar year basis for 2010 and are, therefore, on a different time frame from the WGA accounts which run to 31st March.)
TRUE DEFICIT
The total true deficit is, therefore,
£ billion
WGA Net Deficit 165
Increase in state pension liabilities 346
Total 511
True accounting, as reflected in private sector accounts, would, therefore, mean that the real deficit in 2009/10 was £511 billion not the £156 billion cash shortfall reported by the ONS.
With 30 million workers and an overall population of 62 million, one can say that the annual deficit per capita in 2009/10 was £17,000 per worker, or £8,150 per head of population.
During a House of Commons Committee Public Accounts Hearing into the WGA on 5th December 2011, Sir Nicholas Macpherson, Permanent Secretary to the Treasury, gave evidence and commented:
“Actually, when I look at the cost of ageing, the thing that worries me the most is the cost of the state pension. Okay, you haven’t got quite such a contractual obligation in paying a state pension. Successive governments have occasionally changed the operating formula but they haven’t changed it by much. We could, although we would be qualified no doubt by my friend Amyas (the Auditor General) if we did, stick in several trillion pounds of liabilities for the true cost of the future state pension.”
The ‘several trillions’ refers to the accumulated pensions’ liabilities and would be shown in the WGA balance sheet, not in the yearly statement of Revenue and Expenditure.
Looking ahead, the increase in state pension liabilities is likely to continue at a slightly lesser amount, as some £33 billion of the extra 2010 liabilities of £346 billion was due to a one-off change in entitlements but it would be reasonable to expect a yearly charge of at least £315 billion.
TRUE DEBT 31st DECEMBER 2010
It is possible to construct an estimated true debt position for the two dates, 31st December 2005 and 31st December 2010 and look at the change in total liabilities.
31.12.10. 31.12.05.
Government borrowing 966 424
Public service pension liability 1132 530
Other 322 250
State pension liability 3848 1347
6268 2551
The figures for 31st December 2010 are taken from WGA accounts at 31st March 2010 except for the state pension liability. The state pension liability for 31st December 2005 and 2010 is taken from Levy, ONS, April 2012, Annex 1. The public service pension liability for 2005 is taken from the Long Term Public Finance Report December 2005. The ‘other’ liability for 2005 is a pure estimate.
Thus, in five years, total government liabilities have expanded from £2551 billion to £6268 billion. The difference is £3727 billion over five years, or £743 billion per annum.
The change in state pension liability included changes in discount rates which overstates the difference between the two dates as the liability was under-estimated in 2005.
The purpose of this calculation is, however, to provide a cross check on the calculation of the deficit for 2009/10 which is estimated to be £511 billion. In view of the change in the total debt, even if the initial state pension liability was underestimated in 2005, the estimated deficit of £511 billion appears to be reasonable.
These figures are the accumulated liabilities at the accounting date and should not be confused with other types of calculation of projected liabilities in the future or intergenerational accounts which also project future liabilities such as those provided by the National Institute for Economic and Social Research. These are quite valid in their own terms but refer to projected liabilities and not accrued liabilities at a specified date.
TOXICITY OF PENSIONS
One very important matter to understand about state pensions is that, although the entitlements are variable by law as Sir Nicholas Macpherson points out, equally they are not reduced by inflation as is the case with government debt in the form of Gilts, Treasury Bonds, etc. State pensions are underpinned by the triple lock of guaranteeing uplifts by at least wage inflation, the CPI Index, or 2.5 per cent annually (basic state pension only). The uprating and growth of pension obligations is thus an immovable deadweight unless legal steps are taken to reduce pension entitlement on a large scale. The total accrued state pension liability has increased from £1,347 billion in 2005 to £3,848 billion in 2010, principally due to uprating and discount changes yet GDP per head of population has slightly reduced in real terms from £22,672 to £22,439.
THE MEASURING ROD
Cash control is important. However, no financial or commercial organisation would conduct their affairs with sole reference to cash accounting. Indeed they are legally obliged to maintain accounts according to GAAP.
True accounting shows that, in 2009/10, the real accounting deficit was over £500 billion. This is over 30 per cent of GDP and not the eight per cent normally calculated by reference to the ONS cash deficit. No doubt there will be a fall in 2010/11 as there have been changes to reduce the public sector pension liability and tax measures have reduced the current deficit. However, it is unlikely that the true deficit will fall significantly.
A true accounting deficit of £500 billion means that the true debt is increasing at the same rate and cannot possibly be paid off. Therefore, the public service pension liability and the state pension liability must be drastically reduced.
The present total of debt and entitlements amounts to £100,000 for every inhabitant, or £200,000 for every worker.
FUTURUS/30 March 2013
The true accounting deficit of the UK government in 2009/10 was £511 billion and not the £156 billion shown as the Office for National Statistics [ONS] cash deficit.
The biggest omission by the ONS is the rising liability for the state pension which is not shown in either the cash deficit or in the Whole of Government Accounts.
However, this liability is real and would be compulsorily shown by law in the accounts of any commercial or non-profit organisation.
THE POLITICAL DEBATE
The political debate over ‘the deficit’ and ‘the debt’ is entirely focussed on the Office for National Statistics’ [ONS] cash figures.
This ONS ‘deficit’ is the difference in any given time period between Government Spending & Government Tax Take. Such difference is equal to Government Net Borrowing for the relevant time period.
The ‘debt’ is the total (cumulated over previous decades & centuries) amount of outstanding Government Debt at a given point in time.
The deficit, published every month by the ONS, totalled, in 2009/10, £156 billion for the year.
However, the ONS deficit is not what is understood as a true accounting deficit according to Generally Accepted Accounting Principles (GAAP), nor is it comparable to deficits as stated in the accounts of commercial, financial or non-profit organisations.
The true accounting deficit is much higher than the ONS deficit or the net additions to government borrowing on which so much attention is focussed.
Similarly, the true accounting ‘debt’ is the total of all government liabilities of which formal government debt is only a part.
Sustainable fiscal policy should be based on the true accounting deficit which reflects GAAP in the same way as any other organisation bases its finances on proper GAAP accounts.
CASH ACCOUNTING
The Office for National Statistics’ figure for the deficit is, in fact, a cash control figure, calculated by totalling cash received and cash paid out by the government. When cash paid out exceeds cash received, the shortfall has to be borrowed. Cash is paid out for current spending and capital spending. However, proper GAAP accounting clearly distinguishes current spending from capital spending which is not part of the fiscal accounting deficit.
Cash management is vital but it is not a picture of the true accounts.
The true accounting deficit, which is the financial guide to steer by, must include liabilities incurred but not paid out in cash in the accounting year but which add to liabilities and, therefore, future cash payments in future years.
Cash accounting can be correctly described as pre-medieval since the foundation of modern accounting was described in Summa Arithmetica published in 1494 by Fra. Luca Pacioli, friend of Leonardo da Vinci and co-author with him of a book on mathematics and drawing. Subsequently, accounting based on Pacioli spread throughout the world and became legally compulsory for commerce in the nineteenth century.
WHOLE OF GOVERNMENT ACCOUNTS (WGA)
However, the magnificent effort to produce and sustain Whole of Government Accounts [WGA] by the UK Treasury, the result of efforts going back to the 1990’s, and which produces proper, transparent and authentic accounts according to GAAP, means that, since 2009/10, there is now a much clearer picture of government accounts. The major weakness is that WGA accounts do not include certain off-balance sheet liabilities such as state pensions.
There are three major adjustments required to the ONS’s deficit which enable the true accounting deficit to be calculated. (There are other minor adjustments which have been ignored for the sake of simplicity.)
First, government capital expenditure less depreciation should be deducted from the ONS cash deficit since this expenditure creates assets which will be depreciated over many years in the future.
Second, there are costs which are included in the Whole of Government Accounts in its statement of Revenue and Expenditure for the year which are not yet paid out, principally public sector pension costs but also costs for PFI, nuclear decommissioning, etc. These are not included in the ONS deficit.
The WGA accounts clearly calculate these adjustments for the year 2009/10:
£ billion
ONS Total Cash Deficit 156
ONS Capital Expenditure less depreciation 49
ONS Current Deficit 107
Public Sector Pensions, Impairments, Provisions, etc. 58
(all non-cash items) [Note: this does not include actuarial revaluations of the public sector pension liability]
WGA Net Deficit for the year 165
____
The reconciliation of the difference between the WGA and ONS figures is laid out on page 26 of the WGA.
STATE PENSIONS
The third adjustment required is the increase in the liabilities during the year for accrued state pensions. These totalled £346 billion in the calendar year 2010 after deducting £69.4 billion actually paid out in the year and reflected in the ONS’s cash deficit figure. It should be noted that these figures were ‘clean’ in that there were no changes in discount rates in the year. However, they did include a sum of £33 billion due to a one-off uprating in liabilities for pensions by the coalition government. (Figures from Pensions in the National Accounts – a fuller picture of the UK’s funded and unfunded pension obligations – Sarah Levy, Office for National Statistics, April 2012)
These calculations for state pensions are based, quite correctly, on the accrued cost to date, the pension entitlement already incurred, which has increased during the accounting year.
(It should be noted that the state pensions liabilities are calculated on a calendar year basis for 2010 and are, therefore, on a different time frame from the WGA accounts which run to 31st March.)
TRUE DEFICIT
The total true deficit is, therefore,
£ billion
WGA Net Deficit 165
Increase in state pension liabilities 346
Total 511
True accounting, as reflected in private sector accounts, would, therefore, mean that the real deficit in 2009/10 was £511 billion not the £156 billion cash shortfall reported by the ONS.
With 30 million workers and an overall population of 62 million, one can say that the annual deficit per capita in 2009/10 was £17,000 per worker, or £8,150 per head of population.
During a House of Commons Committee Public Accounts Hearing into the WGA on 5th December 2011, Sir Nicholas Macpherson, Permanent Secretary to the Treasury, gave evidence and commented:
“Actually, when I look at the cost of ageing, the thing that worries me the most is the cost of the state pension. Okay, you haven’t got quite such a contractual obligation in paying a state pension. Successive governments have occasionally changed the operating formula but they haven’t changed it by much. We could, although we would be qualified no doubt by my friend Amyas (the Auditor General) if we did, stick in several trillion pounds of liabilities for the true cost of the future state pension.”
The ‘several trillions’ refers to the accumulated pensions’ liabilities and would be shown in the WGA balance sheet, not in the yearly statement of Revenue and Expenditure.
Looking ahead, the increase in state pension liabilities is likely to continue at a slightly lesser amount, as some £33 billion of the extra 2010 liabilities of £346 billion was due to a one-off change in entitlements but it would be reasonable to expect a yearly charge of at least £315 billion.
TRUE DEBT 31st DECEMBER 2010
It is possible to construct an estimated true debt position for the two dates, 31st December 2005 and 31st December 2010 and look at the change in total liabilities.
31.12.10. 31.12.05.
Government borrowing 966 424
Public service pension liability 1132 530
Other 322 250
State pension liability 3848 1347
6268 2551
The figures for 31st December 2010 are taken from WGA accounts at 31st March 2010 except for the state pension liability. The state pension liability for 31st December 2005 and 2010 is taken from Levy, ONS, April 2012, Annex 1. The public service pension liability for 2005 is taken from the Long Term Public Finance Report December 2005. The ‘other’ liability for 2005 is a pure estimate.
Thus, in five years, total government liabilities have expanded from £2551 billion to £6268 billion. The difference is £3727 billion over five years, or £743 billion per annum.
The change in state pension liability included changes in discount rates which overstates the difference between the two dates as the liability was under-estimated in 2005.
The purpose of this calculation is, however, to provide a cross check on the calculation of the deficit for 2009/10 which is estimated to be £511 billion. In view of the change in the total debt, even if the initial state pension liability was underestimated in 2005, the estimated deficit of £511 billion appears to be reasonable.
These figures are the accumulated liabilities at the accounting date and should not be confused with other types of calculation of projected liabilities in the future or intergenerational accounts which also project future liabilities such as those provided by the National Institute for Economic and Social Research. These are quite valid in their own terms but refer to projected liabilities and not accrued liabilities at a specified date.
TOXICITY OF PENSIONS
One very important matter to understand about state pensions is that, although the entitlements are variable by law as Sir Nicholas Macpherson points out, equally they are not reduced by inflation as is the case with government debt in the form of Gilts, Treasury Bonds, etc. State pensions are underpinned by the triple lock of guaranteeing uplifts by at least wage inflation, the CPI Index, or 2.5 per cent annually (basic state pension only). The uprating and growth of pension obligations is thus an immovable deadweight unless legal steps are taken to reduce pension entitlement on a large scale. The total accrued state pension liability has increased from £1,347 billion in 2005 to £3,848 billion in 2010, principally due to uprating and discount changes yet GDP per head of population has slightly reduced in real terms from £22,672 to £22,439.
THE MEASURING ROD
Cash control is important. However, no financial or commercial organisation would conduct their affairs with sole reference to cash accounting. Indeed they are legally obliged to maintain accounts according to GAAP.
True accounting shows that, in 2009/10, the real accounting deficit was over £500 billion. This is over 30 per cent of GDP and not the eight per cent normally calculated by reference to the ONS cash deficit. No doubt there will be a fall in 2010/11 as there have been changes to reduce the public sector pension liability and tax measures have reduced the current deficit. However, it is unlikely that the true deficit will fall significantly.
A true accounting deficit of £500 billion means that the true debt is increasing at the same rate and cannot possibly be paid off. Therefore, the public service pension liability and the state pension liability must be drastically reduced.
The present total of debt and entitlements amounts to £100,000 for every inhabitant, or £200,000 for every worker.
FUTURUS/30 March 2013