Black holes

The “black holes” now being revealed should come as no surprise to readers of this site. I have set out many times how the true indebtedness of the Uk state is between £3 trillion and £4.5 trillion depending on how you account for bank liabilities, on normal company accounting. (PPP,PFI, unfunded public sector employee pensions, nationalised banks and bad debt guarantees). I first challenged the old government’s rosy portrait in the Economic Policy Review, then augmented the figures as they borrowed more and bought up bank liabilities.

The new government is rightly going to seek independent judgement on the extent of off balance sheet liabilities. We are also learning of the rush to spend and commit to big contracts in the dying days of the Labour government. What else did you think my UK PLC CEO letters were about? We knew it was happening.

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38 Comments

  1. alan jutson
    Posted May 16, 2010 at 1:59 pm | Permalink

    John

    We all guessed it was true, as that was the Nature of the man and the Government.

    The sad fact is the Media bought into the Labour spin and lies, Hook, Line, and Sinker.

    As I have said before many times on this blog, and indeed today on your other posts. It all needs to be made public, so that Labour voters know what the true state of UK PLC really is.

    Once again its a Conservative Government, with Liberal help this time, which has the task of balancing the books yet again.

    WHEN WILL THE VOTERS LEARN, Labour means increased debt.

    • Graham Eardley
      Posted May 16, 2010 at 8:25 pm | Permalink

      Do you think that this new Government will be any better all there efforts so far seem to be about reducing the budget deficit.

      Not repaying the debt.

      Also correct me if I'm wrong still not heard anything about reducing the PSBR?

      • alan jutson
        Posted May 16, 2010 at 10:05 pm | Permalink

        Graham

        Time is yet young, they have only been in power for a week.

        We are at least having an independent Audit (Cameron statement on the Andrew Marr show this morning) that is a logical start.

        Rest assured I am concerned that not enough will be done.

        With the Liberal Democrats in the melting pot I think they may attempt to restrict some of the very neccessary action, but they Plan to have a Budget in 50 days. I do not like some of the leaked proposed solutions, but lets wait and see what action is to be taken before we moan, for the time being.

  2. Michael Lewis
    Posted May 16, 2010 at 2:25 pm | Permalink

    All this makes me think: money printing will be back, unless the government wants to be really unpopular. Do you agree, this is a likely outcome?

  3. Andrew Gately
    Posted May 16, 2010 at 2:34 pm | Permalink

    The big story regarding economic policy is the decision to raise capital gains tax to 40%.

    I have to say you are being very quiet on this issue.

    • Javelin
      Posted May 16, 2010 at 10:37 pm | Permalink

      I think this is good decision and have promoted it on this site for many months. The rise and fall of banking was on the back of second homes. This will restore Market equilibrium.

      • Andrew Gately
        Posted May 17, 2010 at 10:12 am | Permalink

        I think if George Osbourne stands up in June 2010 and announces CGT is going up to 40% from 6 April 2011 there will be a stampede for the exits from landlords looking to sell their properties before 6 April 2011.

        As most tenants have only a one month notice period they are going to be in a very bad situation. My guesstimate is that the countries supply of private sector rental properties will shrink by a third.

        • Mark
          Posted May 17, 2010 at 11:03 pm | Permalink

          You are right: it is a recipe for housing chaos. Moreover, it would trigger extremely rapid house price falls, in turn undermining mortgage collateral and creating the next banking crisis – just when banks are supposed to be refinancing their borrowings under the Special Liquidity Scheme and the Credit Guarantee Scheme at the BoE. Whilst we need to re-align house prices and incomes, this is not the way to do it.

    • Chris H
      Posted May 17, 2010 at 9:43 am | Permalink

      Many years ago we bought a second property for my husband's parents to live in. I believe at that time CGT was 40% (early 1990's). We accepted the fact that, in the distant future, if we chose to sell it when it was empty that we would have to pay the tax. That point in time has not yet arrived, but the raising of CGT back to 40% does not surprise us; we are, personally, simply back to square one. Guess it's just how you look at things.

      • Andrew Gately
        Posted May 17, 2010 at 8:34 pm | Permalink

        The previous capital gains tax computation was far too complicated and the simplification to a flat 18% CGT rate was a good move.

        The return to 40% CGT will be much worse than the previous 40% rate as the treasury have been silent on any relief for inflation and the CGT annual exemption is likely to be slashed to £2,500.

      • Mark
        Posted May 17, 2010 at 11:11 pm | Permalink

        The difference is that there was still inflation indexation allowance back then: no longer. So if you paid £133k for the house back in 1991, under the old rules you would only be taxed today on the excess over £220k. Under the proposed rules, you would pay tax on the whole difference – i.e. an extra ~£36k in tax on what is essentially just inflation.

  4. Nick
    Posted May 16, 2010 at 3:02 pm | Permalink

    Here is one way round it
    http://motls.blogspot.com/2010/05/postal-money-or

    A Czech party has sent everyone a bill for their share.

    You need to start slinging the mud at the people who caused it.

    That is Labour and Civil servants.

    You have to go for the later because they are going to protect themselves against their failures.

    Nick

  5. Brian Tomkinson
    Posted May 16, 2010 at 3:42 pm | Permalink

    It should be made illegal for governments to hold off balance sheet liabilities. Brown has virtually destroyed our economy. No future government politicians should be allowed to wantonly put us all at such financial risk without the sanction of imprisonment. We hear plenty of talk from politicians about regulating banks and companies, it’s about time they were regulated and with some meaningful sanctions.

  6. Deborah
    Posted May 16, 2010 at 4:28 pm | Permalink

    The rest of us suspected it.

  7. michael read
    Posted May 16, 2010 at 4:46 pm | Permalink

    The question is, as Peter Oborne poses in The Mail on Sunday today, whether Osborne can risk a "kitchen-sink dump".

    Tempting as it might be, come clean on the real level of debt and markets will react accordingly. Mayhem will follow.

    I'll get my coat and tin hat.

    • Javelin
      Posted May 17, 2010 at 9:52 am | Permalink

      I think that the markets will start to price in a figure of 3+Trillion (never used that word before) into the debt figures over the next couple of weeks. I know a few banks have used the sub 1 Trillion figure.

      The thing that will push bond yields up will be based on risk of default – and the UK is always seen as a good debtor and not prone to riots and revolutions. Even Marx got that wrong.

      The downside for the UK will be internal strife in terms of rising costs and taxes lowering demand and prices. I would expect house prices to be the chief casuality.

      • michael read
        Posted May 17, 2010 at 2:58 pm | Permalink

        Well, I've been to Athens a couple of times and I never thought I'd see what I witnessed on the TV recently.

        It is accepted that we have a structural deficit which I take to mean that we cannot cover the interest costs on our borrowing.

        At present, we can meet our obligations by judicious cuts and tax increases. The market wont take fright.

        Supposing it is some sort of "super" structural deficit requiring the application of those measures with extreme prejudice.

        Too right demand will fall through the floor. Too right too house prices will collapse (they have borne no relationship to any measure of intrinsic value for some time).

        It's seems to me we'll have the dubious pleasure of witnessing recent events in Athens on the streets of London. As I said, I'll get my coat and tin-hat.

  8. Ex Liverpool rioter
    Posted May 16, 2010 at 5:15 pm | Permalink

    John
    I think your also find that Gordon stopped paying his bills, i have a contact in the civil service & they tell me a major sub contractor is refusing to do any more work because of late & now ZERO payments.

    John, i must ask…….if you where in "DC"' shoes would you come clean on the debt & rise a crash in the £ or like Obama just try to gloss over it?

    Mike

    • Lola
      Posted May 16, 2010 at 11:29 pm | Permalink

      That's not all. Someone I know in Higher Education is / has been totally shafted by HEFC (Higher Education Funding Council) who have totally reneged on their financial committments and then sought to shift the blame onto the FE institutions management. This 'cut' started un McDoom.

      Personally, once the books have been checked, and the evidence shows the colossal deceit by Darling Brown Balls, I'd have them arrested.

  9. john east
    Posted May 16, 2010 at 5:25 pm | Permalink

    I hope Cameron makes a big fuss over this. We need an independent review (by the IMF?), wall to wall coverage of the review findings, a televised broadcast by Cameron denouncing the incompetence of New Labour, and dare I hope, some prosecutions for negligence and malfeasance against the last regime.

    Sadly, much of the above will not happen for good reasons (to avoid a run on the pound), and for not so good reasons (politicians of all colours usually cover up for one another). Even so, if Cameron wants to avoid carrying the can for the grim austerity to come, perhaps this is one occassion that he should make sure Blair and Brown get the full credit they deserve for our current predicament.

  10. Andrew Johnson
    Posted May 16, 2010 at 5:37 pm | Permalink

    Dear John,
    When the result of the independent review into the real state of the UK's finances is complete, I believe it is absolutely essential that a prime ministerial broadcast takes place with Mr. Cameron and Mr. Clegg, explaining in the simplest possible terms, exactly what the true position is. This should be followed up with TV appearances, newspaper adverts, billboard posters, Youtube videos etc.
    In other words, a full blown campaign of clear information over a good period of time. The electorate should be left in no doubt just how financially damaging many of Labour's policies have been to the long term wellbeing of Great Britain.

    I'm convinced that the majority of the UK electorate do not understand how serious a financial position we are in (a major factor in why the Tories did not gain a working majority).
    Having been told repeatedly (propagandised) for 11 years that we can tax, borrow and spend our way to prosperity, many are convinced this is true and we can carry on as we did before.

    Unless this information is communicated clearly to the electorate, I think the coalition will not be able to carry the country with them in implementing the financial measures that are needed to rescue us from financial disaster. Visualise serious strikes and public disorder market meltdown etc.

    PS Very disappointed at yours and David Davies exclusion from cabinet or government posts, but still hoping and praying for good things to come from the coalition.
    Please keep up the good work you are doing, it is much appreciated by many.

    • alan jutson
      Posted May 16, 2010 at 6:18 pm | Permalink

      Andrew Johnson

      Agree absolutely with your comments.

      As for a run on the pound or the markets, if a properly costed plan for debt reduction and future financial management is outlined at the same time, I would have thought that the markets will stand up, its surely better than all of the uncertainty that we have now. After all (the true figures) it will come out in the end.

    • Ian B
      Posted May 17, 2010 at 9:34 am | Permalink

      I also agree with Andrew's comments. This appears to be a dire situation, and the government must explain properly to the public the nature of it. It is indeed a time when the PM, and perhaps Mr Clegg as well, should speak to the nation.

  11. JohnRS
    Posted May 16, 2010 at 7:14 pm | Permalink

    No real surprise I suppose. Brown was always hiding what he did, creating stealth taxes, concealing figures, misquoting numbers, refusing to release information, deliberately confusing the public – sunlight and transparency were his enemies.

    Now I don't think there is any other alternative than to tell the whole truth, quickly. Make sure all the bad news is out there plus a plan to fix it. It won't be pretty but it's better than the alternative. The new government has a short honeymoon period, it should take advatage of it.

    If Dem Tories try anything else it will only be a matter of time before the real situation is revealed anyway. If bad news dribbles out day after day (as it will) we really will see the markets take flight.

    But once the figures are published I'd like to see some real publicity on this. Lists of contracts with who in NuLieBore signed them and when, plus the way they were targetted at NuLieBore seats. Show people how deliberately corrupt these ministers were – try to make sure the public never forget how the damage was caused and who by.

  12. Yarnesfromhorsham
    Posted May 16, 2010 at 7:22 pm | Permalink

    Lets have the UK PLC audit with an IMF overview which would give the findings some gravitas otherwise the likes of The Grundian, Will Hutton and Labour MPs will slate the report as being biased.
    If companies have to show their contingent liabilities then why not UK PLC. I take the point about a possible run on the £ but when disclosing the true picture we indicate the way/s of dealing with the problems then I think sterling could take the pressure.
    We now have an opportunity to be open with the electorate so lets take it. In corporate recovery the first steps are to stablize the position address the balance sheet so that liabilities and assets reflect the real postion. Lets just do it.

  13. Magelec
    Posted May 16, 2010 at 7:30 pm | Permalink

    Well John, the time is coming. How much of the true financial state is to be admitted by the Government? Don't you think that outside financial interests in the UK already have a good idea of the true state of the UK finances? If there is a run on the pound I believe it could be short lived if the Government state how they propose to solve our debt problem. Have they got the balls to let the British 'Joe in the street' and the wider world in on the secret and firmly pin the blame on TB and GB?

  14. Man in a Shed
    Posted May 16, 2010 at 7:40 pm | Permalink

    The Conservatives have been poor in the past on pinning the blame – preferring to move on and deal with what’s coming up.

    On this occasion we must make an exception.

    The economic crime against the country committed by Labour must be pointed out to the country again and again and again until people are sick of hearing about it.

    This of how Labour communicated their “Ensuring the recovery” lie and use the same force of communication only 10x harder.

    The future of the country depends on who gets the blame for the current mess.

  15. ps
    Posted May 16, 2010 at 8:20 pm | Permalink

    Are the perpetrators going to get away with their grossly irresponsible….. behaviour?

    In the interests of trying to save their political party and their own cushy lifestyle they have been happy to trash the countries and its citizens finances. Having been complicit in this wrong it is no surprise they were highly motivated to stay in power to avoid being found out.

    Not only is it essential to show to the public what Labour have been prepared to do (even if this does freak the gilt markets) so the public can understand the morals of labour, but also to get the public onside for the hardship that is surely coming.

    Also an example needs to be made of those that are guilty to try and remove the temptation for the same to happen next time Labour manage to gain power. (There should be a suitable punishment…)

    I hope the BBC will get the same treatment for their collusion with the rotten regime.

  16. Mike Stallard
    Posted May 16, 2010 at 11:27 pm | Permalink

    You are totally right: you have been dissecting this financial disaster for well over a year now. That is why we all keep coming back to it. You get the truth!

  17. Lola
    Posted May 16, 2010 at 11:42 pm | Permalink

    I really do not think that revealing all the financial horror left by Darling Brown Balls will be a problem – if it's done properly. If you have a financial problem, and you need to see the bank, what they want to know is one, that you know that you have a problem, two, how big that problem is, and three that you have a coherent plan to dig yourself out of the mire. The bank will know better than you think just how badly off you are and will judge you on your honesty.

    In our national case the banks, the international bond markets, have known for a long time just how bust we are, and have been lending to us on the basis that Darling Brown Balls would be replaced by a proper and honest government. They, the capital markets, put great faith in a 'wise and ancient people' to return a Government committed and capable of properly resolving this mess.

    Let's hope that the ConLib government is up to it.

    (P.S. Wince Cable isn't – up to it, that is).

  18. Roger
    Posted May 17, 2010 at 2:18 am | Permalink

    Does Osborne need to come clean now, cant that wait until the situation is slightly improved

    Surely the pressing concern is urgent action, both cuts across services and tax increases, if thats necessary to pay off the countriy's debts.

  19. Trevor from Greenwic
    Posted May 17, 2010 at 2:58 am | Permalink

    Coming in to the election I was hoping that Labour would stay in power because I have long been of the Mervyn King persuasion on all of this.

    The unions are spoiling for a fight and the heavy mob will soon be preparing to take the battle to the streets.

    Just as all hell is about to break loose, the perpetrators can stand on the sidelines and throw fuel on the fire while the coalition attempts to deal with it.

    I can only echo the previous comments and hope that a plan is being developed to shake the scales from the eyes of a very large proportion of people in this country who are blissfully unaware of the extent of the necessary financial hardship to come.

    How about a basic pamphlet (and website of course) delivered to every citizen of this country which outlines in simple terms the 'accounts' for UK PLC as at summer 2010? Designed and written for the average drinker at The Dog and Duck and signed off by an independent authority. For the foreseeable future it could be an annual publication to show the fruits of the hardship that is being endured and of course it throws down a useful gauntlet for the next Labour administration whenever that is because if that operates in the same way as all previous Labour administrations such transparency would be rather inconvenient.

    • alan jutson
      Posted May 17, 2010 at 9:27 am | Permalink

      Trevor

      The Eu have not had their Accounts signed off for 13-14 years now (I think its 14 years)

      Labour have not come clean on UK PLC finances for 13 years.

      Is there a Socialist policy type link here ?

      Think the idea of Audited Accounts for UK PLC each year a good idea. That I guess, used to be the idea of a Budget Statement each year, but Labour soon trashed that with the devil hidden in the detail, and manipulation of figures and comparisons.

  20. emil
    Posted May 17, 2010 at 11:25 am | Permalink

    If the lessons of 1979 are learnt then this government will spell out the true state of the mess they inherited. This will neutralise Labour party comments 20 years hence about the horrible medicine Cameron and Thatcher had to administer without being able to gloss over the fact that they when they took care of the patient it was all but dead.

  21. Citizen Responsible
    Posted May 17, 2010 at 7:20 pm | Permalink

    I agree with the other comments here:

    •The TRUE state of our economy must be flagged up
    •The blame for the black holes must be squarely placed where it belongs, on the shoulders of Labour and Gordon Brown
    •The government needs to show how it proposes to deal with the debt problems.

    Labour must not be allowed to get away with the lie that we were in recovery under Labour and that the new government has damaged this recovery by “cutting too early”.

  22. Magelec
    Posted May 17, 2010 at 9:57 pm | Permalink

    There was some talk/text in the newspapers that the incoming Government might invite the IMF to undertake an independent audit of the UK finances. If that was to take place it would avoid the certain critisism of the audit Sir Alan Budd is now to take place.

  23. Lindsay McDougall
    Posted May 18, 2010 at 3:00 am | Permalink

    Guarantees are not liabilities but they run the risk of becoming liabilities if the companies or countries in receipt of the guarantees do not give a satisfactorary financial performance. They have to be assessed on a case by case basis and removed wherever possible.

    There was a time when Network Rail had substantial accumulated liabilities that were in effect state guaranteed. It is unlikely that Network Rail could pass these on to train operating companies in the form of track access charges. With RBS and Lloyds, it can and should be different. There is no need for a bank to be unprofitable and activities that can not be made profitable should be stopped.

  24. Big John
    Posted May 19, 2010 at 2:50 am | Permalink

    4.5T/60M = 75K per person

    Who is responsible !!!

    (Obviously the old Labour cabinet is a good start).

    (waht enquiries and action will be taken – will the Ministers and senior civil servants responsible be held to account? ed)
    Ciivil servants (could-ed) negotiate the contracts on behalf of the taxpayer, then seen to retire as consultants for the companies they did the negotiations with!! (Need chapter and verse to back up such an allegation – there are rules to stop this-ed)

    Then they (could-ed) negotiate the next contract with people who used to work for them, who then go on to retire (With the usual over the top taxpayer guaranteed pension), and then work as “Consultants” for the same company.

    Who is looking into this?

    It must be obvious to anyone that anything that would normally cost £10,000 seems to cost the tax payer £1,000,000.

    It seems to cost more, the bigger the contact is worth (It should get cheaper).

    If anybody can’t see this then, then explain why certain companies still get contracts, even when they fail to deliver every time.

    I someone looks into the point I am making, we are in a good position to get some of our money back…….

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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