If the government wants to spend money on a program — presuming it’s unwilling to simply roll the printing presses — it must choose between two ways of acquiring the needed funds. It can borrow the money, or it can raise it through taxation. Neither source is ideal. The disadvantage of raising taxes is obvious. The disadvantage of borrowing stems from markets taking notice, and — if you do it often and irresponsibly enough — punishing you for it.

In Britain, Labour found a third way: i.e., writing very long-term contracts to private firms responsible for building and maintaining capital assets, in return for annual payments. Practically speaking, this mounts up to the same as borrowing — a contact, like debt, represents an obligation to make a stream of future payments. But legally speaking, it’s not the same, because in the U.K. contractual obligations are not accounted for in the same way as traditional debt.

The result? Since 1997, Britain’s Private Finance Initiative (PFI) has piled up billions of pounds of obligations that do not figure on the balance sheet. Simply adding up the future payments is naïve, because it ignores the time value of money, but the figure is illustrative nonetheless: it’s now 217 billion pounds over the next twenty five years. A better estimate is that, in today’s money, Britain’s PFI obligations amount to 124 billion pounds through 2041 — not an unsustainable sum on its own, but also not the kind of debt that’s wise to ignore.

Britain’s unions, suffice it to say, have never been fans of PFI, and now that the buzzards are circling over Labour and Gordon Brown’s spendthrift ways, they’re out for blood. In theory, this is because, as one union officer put it:

PFI is a flawed and expensive exercise that continues to consume billions of pounds in costly contracts for the enormous profit of private companies. This is money that could be better spent on frontline services for patients and clients.

Of course, it is union members who are responsible for providing those “frontline services,” so, in practice, the union is actually exercised about competition for the funds going toward these costly contracts. The unions are right to criticize the government’s failure to put PFI on the books, but wrong about most everything else. The next government in Britain will have a tough time retaining the good in PFI and discarding the bad.

But fixing PFI isn’t an isolated internal problem for Britain. As I’ve pointed out elsewhere, it’s got serious implications for Britain’s defenses. And, more broadly, it’s also an issue worth keeping an eye on in the context of U.S. fiscal policy. As the Obama administration’s budget bloats, the temptation to try a PFI-style trick in America will grow. Right now, the U.S.’s system of budgetary scoring makes it difficult to keep expenses off the books. But as the history of British Labour shows, a desire to spend combined with an unwillingness to pay can lead to all sorts of creative accounting concoctions, even in a country like Britain, formerly renowned for fiscal honesty.

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This entry was posted on Tuesday, June 30th, 2009 at 4:19 PM and is filed under Contentions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.