Whatever happened to Credit Easing? And exposing the flaws in the UK Budget system

Today I wish to open by looking at a planned move by the UK government which will exploit the difference between appearance and reality to the disadvantage of taxpayers and to the advantage of politicians. It concerns the fact that the pension fund of the Royal Mail (the UK nationalised postal service) will be taken over by the UK government. Ironically it is not the takeover itself that is the problem because due to the way the pension scheme had been guaranteed the UK taxpayer was always on the hook for any deficit in the scheme.

What is the state of play?

Bloomberg has reported that the Royal Mail pension scheme has £28 billion of assets and liabilities of £37.5 billion. On this basis the UK taxpayer is about to be aware that they are acquiring an expected loss of £9.5 billion. So let me present you with national scandal number one and as David Byrne put it.

How did I get here?

UK taxpayers will rightly wonder what trustees and indeed government ministers were doing in the past to let this happen. These schemes are supposed to fund themselves and yet those responsible for stewardship have failed and yet as ever apparently no-one amongst the well paid ranks of people who are supposed to represent their interests are apparently responsible!

There is a further problem with this situation as we can reasonably value the assets but valuing future liabilities is a problem. Royal Mail pensioners will be receiving their pensions over the succeeding years and decades and frankly it is impossible to predict exactly how much they will cost. For example, the Institute of Economic Affairs has estimated that the future liabilities will be some £10 billion higher raising the deficit for UK taxpayers to nearly £20 billion.

Yet another problem for Quantitative Easing

As the Bank of England ploughs ahead with its Quantitative Easing programme with another £1.5 billion today of UK Gilts (government bonds) maturing between 2027 and 2060 we see that today it is acting in an area which affects pension funds. If it reduces interest -rates at the longer end of the Gilt market then it makes annuities more expensive and raises future costs for pension funds. If you read articles about the effect of QE on pension funds this is usually what is meant.

However there are other problems. If you believe that extraordinary monetary policies like QE have boosted share prices and asset values,which I do, then the Royal Mail asset value has been artificially affected too. Not easy now is it?

Even worse there is an element of pensions geekery where the future liabilities of such funds are calculated according to a AA Corporate Bond interest rate which will have been affected by QE too. Of course there is the additional problem that the credibility of using ratings to value debt has been given an enormous downwards knock by events in the credit crunch era.

The deeper problem UK public-sector accounting

Whilst we are not exactly sure of the size of the Royal Mail pension fund deficit  we are sure that there is one. However due to the system of UK public-sector accounting when it comes onto the official books it charges into a phone booth and comes out dressed as Superman. This is because the assets of £28 billion are counted but the higher future liabilities are ignored! So whilst the UK taxpayer is receiving expected future losses the UK public-sector accounts show an improvement of £28 billion in our national debt. Even in thse times of numerical and actual inflation this is a tidy sum although the rub is that it is a tidy sum based on financial alchemy.


So what we are seeing here is a perversion of the role of a balance sheet where you count assets but ignore (future) liabilities. The supposed justification for this is that the pension liabilities could be defaulted on, which in itself is very weak as you could use that rationale for virtually any liability.

The danger for taxpayers and in particular future taxpayers is that the “boost” to the national debt numbers arising from this will lead to more public-sector spending which our politicians of every hue tend to like. Then at a later date we will see “an entirely unpredictable surprise for which no-one is to blame” when the pensions have to be paid. Actually more likely the numbers will be hidden in fiscal statistics which disappoint.

We see a situation that now has an additional layer of complication as we could do with a fiscal boost especially one which is “free”. But we have two problems with this . Firstly it is not free and secondly politicians have a dreadful record in wasting money. Let me give you an example of this.

Aircraft Carriers with no aircraft

The UK contracted under the last UK government to purchase two new aircraft carriers the Queen Elizabeth and the Prince of Wales. To those who follow such matters amber lights were already flashing as the UK abandoned full scale aircraft carriers as too expensive in the 1970s and went for smaller flexible ones which flew Harriers. How come they were no longer too expensive for the UK?

These carriers were supposed to cost £3.9 billion but as is the way of things the latest estimate is now much higher at £6.2 billion. In the new straightened times we are unable to afford aircraft for them. So to my mind they pose a serious problem not only for our military but for economics. Building them adds to Gross Domestic Product but what if they turn out to be the equivalent of digging a hole and filling it in to employ someone? Yes work has been done but my point is that it is not productive work.

We did actually have some aircraft that could have flown off the carriers as the UK Harrier force did so regularly but we scrapped them. In the clowning that has gone on here we probably scrapped our most effective aircraft as for example it was the plane we first sent to Afghanistan where due to the thin air I gather the Tornadoes we kept struggle to get off the ground so much that one did not manage it.

So the portents for us spending the “boost” wisely are not good.

The Irish National Pension Reserve Fund

The danger of having assets sitting on a public balance sheet have been shown by the Irish NPRF. The story starts well as back in April 2001 money began to be put aside for future pension liabilities and so far so good. However as Ireland’s banks hit trouble Irish Ministers changed the law so that they could direct the NPRF to invest in them and hopefully kick this particular can down the road. Take a look at the results from the latest update.


Since 2009 the Fund has invested €20.7 billion in preference shares and ordinary shares in the two banks (Bank of Ireland and Allied Irish Bank),

At 31 December 2011 the total value of the National Pensions Reserve Fund was €14.5 billion, comprising the Discretionary Portfolio of €5.4 billion and the Directed Portfolio currently held at €9.1 billion.

It is the Directed Portfolio (which means what it says…) that is to be compared and if we allow for dividends paid the money invested has nearly been halved.

There are two fundamental problems here which start with politicians being usually useless investors and end with the issue them being in charge. People with short-term priorities like politicians are exactly the wrong group to plan long-term investments.

Credit Easing looks like a damp squib

Last autumn the UK government made various grand pronouncements about its plans for Credit Easing. As I wrote at the time it was a confused policy which ministers such as Francis Maude and Justine Greening seemed to queue up to demonstrate that they did not understand it. It has now resurfaced but the £20 billion will only reduce interest-rates for small businesses by a claimed 1%. Yet let us do some number crunching.

The UK can borrow for five years at 1.22%

Add 1% in a generous allowance for costs

So with a cost of 2.22% we see that loans to small and medium sixed businesses were available at 3.22% or 2.22% plus 1%!? I hope you get my point that something is wrong here.

I would like to make it clear that I hope that the scheme works but as it stands quite a few matters do not seem to add up to me.

High Speed Two

For foreign readers HS2 refers to a new planned railway line which initially will go from London to Birmingham and then maybe onto Leeds and Manchester. Let us take a look at the plan which rather ominously was given by Justine Greening who along with not understanding credit easing thinks that electric cars are immune to rises in the price of fuel!

The capital cost at 2011 prices of building the complete Y network is £32.7 billion

So here we have problem number one. How much will it actually cost as public-sector schemes of this sort invariably overrun? For example the London Olympics has gone from £3.6 billion to £11 billion with nobody apparently responsible.

To counter claims that this is a lot of money to get to Birmingham train station just under half an hour more quickly we were told this.

At present values, it will generate benefits of up to £47 billion and fare revenues of up to £34 billion over a 60-year period.

Frankly this looks like meaningless gobbledygook to me. Fantasy dressed up as accountancy. For a start how do we know that in 50 years time we will not have superseded trains?


The clash between the long-term needs of a nation and the invariably short-term wants and needs of politicians has been exposed and expanded by the credit crunch era. In times of economic growth the problem is often swept up in the growth itself. But now we need to plan more carefully and I will be interested in readers thoughts as to what we should do. We cannot go on as we are.

So any forecasts tomorrow should be taken with much more than a pinch of salt.



This entry was posted in General Economics, Gilts, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • Patrick, London

    Interesting and sadly, depressing article. Unlike Slartibartfast I’m not sure whether I’d rather be happy or right in my understanding of where the economy is now/is heading.

    Apologies for a hijack here, but I’d be interested to hear whether you know the figures for the number of properties owned as BTL in this country, along with any rate of increase/decrease of BTL purchasing. Also, do accesible records exist to show how many properties are owned by what number of people? Finally, is there a non conspiracy theorist rationale for why there isn’t a taxation increase on second, third, fourth homes etc?

    There’s lots of awful short-term decision making going on with the government’s budgets as a whole, which as you rightly point out, is inextricably linked with the nature of modern day career politicians, but the lack of correction in the housing market seems to be at the root of a lot of average Joe concerns. 

    It strikes me that the market could be positively affected by BTL becoming very unattractive due to taxation. Increased revenue for the government, or an increase in the number of properties for sale, helping price reductions. 

    Fewer BTL properties would probably help prop up the exorbitant rents that can now be charged due to the current housing situation, so even the landlords might not lose out much, beyond the hoped for (and unreasonable/unlikely) capital growth. 

    You may have covered this in an older article, but I’ve been following for a while, and hadn’t spotted something specific to your thoughts on why the above hasn’t been offered by the government.

    Also.. in 60 years time, if my train isn’t floating through the atmosphere as I celebrate my 100th birthday, I’m going to sue Hollywood, Sci Fi writers, and all Game Designers. For Crying out loud, Skynet became self aware last April, and the Replicants should be back on earth in 7 years. 

  • Drf

    Hi Shaun,

    “But now we need to plan more carefully and I will be interested in
    readers thoughts as to what we should do. We cannot go on as we are.” That is of course true, but politicians being politicians they will not recognise it!  The root of the problem is that politicians in government do not have the skills or proper training for the job, and they are corrupt almost without exception.  Above all they have a complete inability to control money and to understand the large actual amounts involved and how they compound. When dealing with other people’s money they have no concern since it is not theirs and not their potential loss.  Therefore although as you observe we cannot go on as we are THEY WILL!  Eventually there will be national fiscal disaster and there will be forced action rather as in Greece now, unless there is a violent revolution or coup first. 

    I watched afresh an old film a few nights ago called “Mr. Smith goes to Washington” with James Stewart in the leading role.  This has recently been restored from archive material. It was made in 1939.  As I re-watched it I was astonished to realise that the plot recounted a political scenario very like that now; politicians do not change and their abilities to control other people’s money and appetite for corruption does not change.

    My recommendation for what we should do is that any individual and their family should leave the EU altogether pronto and go to live where taxes are much lower and government spending is much lower.  That is now the only escape from ruin.

    “So any forecasts tomorrow should be taken with much more than a pinch of salt.” Should anyone pay any attention at all to any forecast made by any government or any government agency?  As I have pointed out before on this blog none of them are to be trusted, because their objective in publishing these forecasts and supposed statistical numbers is quite different from that declared and quite different from that in the interest of those receiving these forecasts.  Some have suggested that whatever any government or government agency forecasts or states should always be treated as the direct opposite of truth.  That is probably the reality.

  • Anonymous

    I believe that HS1 came in below budget, so it is possible.

  • MickC

    I don’t think HS1 was entirely new though. Wasn’t it effectively a renovation of existing track?

  • James

    Great piece although very depressing. I love the idea that the assets of the pension fund count, but the liabilities don’t.
    The key message from the whole of the last fifty years is that, where governments are elected by people who think/hope other people will pay, there is no mechanism for rational analysis of what governments should do and pay for.
    The only time that politicians are able to cut expenditure seems to be where the recipients of reduced spending have no say (e.g. Greece, Portugal, Ireland etc). the rest of the time, the instinct to sponge of the general weal seems too strong to resist.

  • Anonymous

    It is all new, except that St Pancras was an existing station.

  • Rods

    Hi Shaun,

    Another really excellent blog.

    Don’t politicians like grand projects like HS2, which will do nothing to solve Heathrow / Gatwick runways running at full capacity, so if an aircraft misses its takeoff slot, it is normally delayed for hours waiting for another one! We also need electricity to run the trains and with the retirement of older polluting power stations, to comply with EU law and the delays in building replacement nuclear ones, it is looking increasingly likely there is going to be an energy gap here.

    I’m glad you have touched on pensions as this with old age health care and care home provision I can’t see how it is sustainable. We are told that we currently need immigration so there are 3 working tax payers to pay for each pensioner. So with this expanding population, when they retire they will each need 3 tax payers to support them! As today’s tax is tomorrows pension, health care bills etc., this is a giant Ponzi scheme and at some point there is going to be a Madoff moment where the money has run out. I suspect it will be in the 2020′s or 30′s.

    Now will the poor returns on pension funds over the last 10 years and this probably continuing for the foreseeable future along with poor annuity rates, even those who have tried to have a good private pension are going to be disappointed. With long term energy and food prices only likely to go in one direction, upwards, then I think there are going to be a lot of very poor old people.

    I can’t see how Western society is going to survive in its present form, as clearly with most GDP to debt rations approaching 100%, the capacity to borrow is going to run out.

  • Anonymous

    I have several suggestions for you.

    Firstly we use binding democratic referendums to replace politicians diktat. Switzerland does use referendums and appears to be better run than the EC.

    Secondly, in regards to government agency statistics – use markets to predict forecasts. Unfortunately this won’t work when governments are allowed to manipulate the market.

    Thirdly, consider information service businesses to provide alternate forecasts. The rub here is – who will pay for the service ? The big 3 ratings agencies provide free credit ratings but does this compromise their ability to issue bad ratings ?

  • Anonymous

    A word of warning for prospective financiers of HS2. Eurotunnel forced a debt write down on creditors. I think that many of the original railways also had debt write downs and bankruptcies in the Victorian era. And if private financiers won’t take the risk then the government should not either.

  • Anonymous

    Hi Shaun
    Thought provoking as usual. Incompetence and hubris will continue. It’s part of human nature. In the notayesman tradition however I want to refer to some good analysis of the long term fiscal sustainability of the UK. In my view, we will all have to work until we drop. The Office for Budget Responsibility is usefully reviewing long term fiscal sustainability, the costs of an ageing population, contingent and actual pension liabilities, lost revenues from North Sea and fuel duties etc. They encourage the production of Whole of Government Accounts ( WGA) which depart from the ‘clever by’arf ‘ accounting you refer to.Those accounts do try to start to map assets and liabilities on a commercial accounting basis – referring to much of that left out of PSND accounting.

  • JW

     Hi Rods
    In response to your comments about ‘energy gap’. This will not be a ‘gap’ but a yawning cavern. The ‘older polluting power stations’ closed by EU dictat contribute 50% of the UKs electricity supply. With scrubbers and FGD installed, their only ‘pollution’ is a plant food gas. When the UK is suffering brown outs, and then black outs on a regular basis whilst China burns 50% of the world’s coal, it will ‘warming’ to think of all that good that is being done to the planet.

  • Ian_jones

    When the country has been so skewed to the left by the last Labour Govt (spending from 37% GDP to over 50%) it is always going to take a long time to bring it back. Its even worse for the higher rate taxpayer because the extra spending has not gone to them so taxes rise for less service. This was always going to be the outcome of socialism following the war, Thatcher only made a small dent. The question is how will the next 30 years go, if we dont fundamentally change then we are destined to stagnate for the whole time as China, India and the rest quickly catch up and overtake us.

  • Drf

     Hi ExpatInBG,

    Are your answers intended for me or in response to Shaun’s questions?

    I think you raise some good points, but with regard to the first there is no way in which UK or EU politicians would ever accept your suggested binding referenda to the curtailment of their autonomy to wreak havoc without violent rebellion. Switzerland is as you infer much better run than the EU without doubt.

    On your second point you describe exactly why that does not have much potential for reality.  With the third, most larger businesses already do use independent data services and forecasts, but as you observe it is expensive.  The results are not always accurate in any case because the reality is that it is impossible to predict the future with complex systems, because there are too many unknown variables.  Murphy’s law being as it is, an unexpected variable which had not been considered to be significant comes from nowhere like a stray filly and demolishes the complete forecast which you paid so much to obtain!

  • Rods
  • Anonymous

    Hi Patrick

    Many deadlines go by Skynet is one and the bloke who offers followers “rapture” seems to have had various goes at it! There is supposedly one for Greece on Friday and on and on they go…

    As to the Buy to Let market here are some stats to keep you out of mischief for a while on this link. http://www.cml.org.uk/cml/media/press/3144

    As to my views I think that we should start by applying the taxes we have as for higher priced property stamp duty has become voluntary. I can see that you have given this some thought so what would you do to 2nd.3rd homes and Buy to Let?

  • Anonymous

    Hi Drf

    As to politicians I wonder if it was always so and I supect that in general this has been the case. Indeed the James Stewart film is evidence of that. But in a crisis like this it becomes much more  obvious…And this makes me wonder about the timing of the film (just pre WW2….)

  • Anonymous

    Hi Expat

    I have been thinking of the first one myself as a way of expanding my plans for democratisation of the Monetary Policy Committee. In the modern communication era it should be much more flexible and feasible.

  • Anonymous

    Hi James

    Thank you. As to your point about cutting expenditure it has made me think about what they cut and I find myself thinking that “we are all in it togther” and other such phrases were a mirage…

  • Anonymous

    Hi Rods

    Thank you. On the pensions issue of the worker/pensioner ratio then the place to look where problems are much nearer is the land of the rising sun.

  • Anonymous

    Hi Shire

    I hope that the “holistic” accounting by the OBR will give us a better road map. The catch is that most of what the OBR has done/forecast so far has been wrong! It has not gone well as a concept although to be fair these have not been easy times for it to start in…

    Still if they do a decent job then we can resume debating the assumptions made :)

  • JW

     Waste of time and money. Scottish Power have looked at exactly this set-up via Peterhead for at least two decades. Can’t make it work.

  • Patrick, London

    I’d love to see the figures for how many individuals hold those BTL mortgages. It feels as though you can trace the price boom through the TV shows of the last 20 years, starting with Changing Rooms, and on to Property Ladder and Location. 
    Week after week, these ‘entrepreneurs’ could make what seemed like disastrous choices with regards to their improvements, yet still ‘make money’ from a rising market… Let’s all get on board. It’s Money for less than nothing!Self certification, overseas investment, interest only BTL mortgages, and equity release specialists… the blood boils.I get it though, shoddy returns on savings, volatile markets, who doesn’t want a sure thing. So what the hell was a supposedly socialist government thinking when this land grab was going on? Perhaps because it was open to anyone (who had disposable cash or were prepared to lie), it felt egalitarian. Maybe it could’ve worked as well, if safeguards were put in place to limit individual avarice. All that was needed was a combination of increase on stamp duty for each subsequent home, combined with an increase on taxation from either the rental income from those properties or an increased capital gains tax on the sale of that asset. By the fourth home, the costs involved would make it much less attractive to continue on the buying spree.I accept that there are people who need, or prefer to rent, and that therefore there is a need to have rental property, but the form of taxation I’ve described shouldn’t drastically reduce the number of rental properties, it would just distribute them, inevitably leading to more competition for tenants, creating a healthier marketplace with no monopolies. This could reduce the governments burden on council tenancies as rental prices could come down. It could have cooled the housing market at the time, but would certainly have an impact now as those landlords with over 4 or 5 properties look to release those houses back on to the market to ease their tax burden.More Homes on the market, more competition in the rental sector, more part time landlords (Who would still have to meet a lot of criteria) who have a reliable investment for their retirement, cheaper rents, cheaper houses, FTB able to get on the ladder, more money in your pocket, more money to spend.One more thing – Seems odd to me that we have a system where an individual can’t afford a house where they work in the South East, who then chooses to get a mortgage on a property to rent out outside of the south east which they can afford to pay for, has to get a much more expensive BTL mortgage when it is their sole property. Another way to make it difficult for FTB to get on a ladder?!?Is the higher rate on a BTL mortgage an artificial way to discourage BTL…? Might actually work if we hadn’t had artificially low mortgage rates for so many years now.Sorry for the long post!

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Patrick

    The proliferation of TV programmes on the housing market were a sign of a problem and if that wasnt enough I agree that some were in effect promising a get rich quick future.

    I am a fan of a free market and rather than taxation (which in politicians hands would lead to spending even if there wasnt a need) my preference would be to reform the banking sector. Accordingly there would be buy to let mortgages but not so many and hopefuly the froth would go out of that market.

    As we stand the housing market is actually seeing a boost with the mortgage guarantees I wrote about a week or two ago and I wouldnt be surprised to see it receive more help. Wasn’t it Charlie Brown in the Peanuts cartoons who used to say.

    “When,when will I ever learn?”

  • Anonymous

    Hi Drf,

    On politicians, I agree that our current politicans are too deep in their trough to allow us referendums, but there is hope of a new party or an outside party taking up the mantle. In times of crisis voters are more willing to support outsiders.

    While I agree with Nigel Farrage on the EC, I think a 1 issue party cannot become the government using the UK’s first past the post system. If they promised us voter democracy they might gain lots of votes.

    We have a lot to be thankful for with our political system, as much as I hate Brown & Balls for wrecking the economy with debt and their useless “balanced budget law” which didn’t put them in jail, they did release power in accordance with our electoral law. The EC is not all powerful, Cameron vetoed a stupid tobin tax and Rajoy refused to comply with austerity. To misquote Stalin – how many divisions does the EC have ?

  • Patrick, London

    I’ll look for the article on the guarantees…. sounds interesting. In an ideal world (hah!) the taxation would be invested in new builds / empty housing stock regeneration / brownfield site development, as opposed to being swallowed up in the general kitty.

    Without that guiding hand that was supposed to moderate free markets (whether deity inspired, or derived from communitarian principles) I cannot accept it as a long term solution. Without massive revisions to corporation laws – or perhaps the removal of corporations altogether as a legal entity, I really don’t think a free market will ever be guided by a moral philosophy.

    The BRIC countries look to me to have 10-20 years max, before they’ll need to be outsourcing all their manufacturing to (most likely) the least developed parts of Africa. Their own populations, will become increasingly aware and desirous off ‘higher standards of living’ (i.e. consumerist behaviour) and the economies will need their people to buy stuff. How long before the work place demands for wage increases reduce their cost effectiveness. 
    It will be interesting to see where this will be felt first – I would guess Brazil. India (largest democracy – most ingrained class/caste system with) to follow, with China and Russia resisting the longest due to the blatantly/slyly totalitarian nature of the governments.

    Potentially Africa benefits as infrastructure is required… who knows, could be the making/saving of the continent – but do the BRIC countries begin to stagnate? What happens when it all happens again. Will we be so destitue at this point that we’ll have a thirving sweat shop industry, so that those self cleaning jeans, and hover trainers are now made in England?

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Patrick

    It was contained in here.


    As to the other issues you mention I have a friend who is working to help the Ghanian economy and he tells me economic growth is now 7/8%. So we may see changes in some of Africa faster than we think and let us hope that any economic improvement will help with the famines and other porblems that the continent is prone too…

  • Anonymous


    HS1 revenues below budget. Looks like HS1 is another project requiring taxpayer bailout.