In the red in the Red Book

In the early 1980s all the figures you needed to understand public finances were published annually in the Red Book. Tyically around 40 pages long, it had a plain red cover. If you read it you knew the state of the national accounts.

Labour’s last Red Book, published in March 2010, was 227 pages long. Whilst the titles on the cover were still in red, it was glossy with photos of police, underground trains, windmills, a woman in safety goggles and a couple of women at the greengrocers. There were more figures and tables than in the older versions, but the shifting series, differing baselines and questionable forecasts meant it was more difficult to understand what was going on with the public finances. The differences sum up the age of spin.

I was pleased to read today that David Cameron is now warning the country about the likelihood that the new Office of Budget Responsibility will come up with lower and more realistic forecasts of growth for 2011 and 2012. Readers of this site will remember I set out the possible impact this will have on the deficit a few days ago. If you read the Labour 2010 Red Book carefully you can see officials already had their deep doubts about the Chancellor’s forecasts.

In one of the most interesting full page essays officials got away with publishing “Uncertainties around current forecasts”. In this they pointed out that the Labour government had forecast 0.75% more growth for the year ahead on average during the period 1998-2009. They stressed that these errors mainly reflected poor forecasting in the last three years. They also pointed out that most independent forecasters and the Bank of England were forecasting lower growth, or forecasting more risk of lower growth than the government.

That same 2010 Red Book revealed that public sector net worth has crashed from 70.9% of GDP at the end of the Thatcher period to 22.4% in 2008-9. Despite the massive spending, net worth has fallen as a result of public sector wealth destruction and heavy borrowing. It also shows that the government spent £118.6 billion on interventions with the banking sector with no path identified to get all that back. Any potential “profit” on share sales has to take into account this large sum of total support, and the risky assets we are all still underwriting.


  1. Richard
    June 6, 2010

    Much of the decline in public sector net worth must be due to Gordon Brown’s disasterous bank bailouts I assume? Discussion of a ‘profit’ on the sale of bank shares is meaningless while the taxpayer still underwrites the banks’ balance sheets – in fact taxpayers would be better off keeping control whilst the liability is outstanding. Whilst most of Labour’s economic record is now comprehensively discredited, there are still very few – unlike you – who challenge perhaps the biggest error of all: the bank bail out. Did you notice that the Khazakhstan Govt has rejected the Brown bailout model and forced a restructuring of a bank (BTA) with the creditors taking a write-down? It is time mainstream commentators started to recognise the folly of Mr Brown’s bank bailouts and the huge unnecesary cost to taxpayers.

  2. john east
    June 6, 2010

    The mind numbing incompetence, distortions, and spin (dare I say, lies?) perpetrated by the last government deserve far more publicity before the current administration takes ownership in the eyes of the electorate of the current economic calamity and begins implementing the coming austerity measures.

    I accept that it is most unlikely that we will see the well deserved prosecutions for wilful negligence or for the apparent scorched earth policies pursued in the last, craziest, most divorced from reality year under Brown. However, I wonder if legislation could be passed to hold future governments to some account for their performance?

    Those of us in the real world often have to face performance reviews, and failure is usually rewarded with a low pay rise and no bonus. In politics, total failure appears to be rewarded with a massive pay off, and a peerage.

    This is not right.

    At the very least we need to see Cameron on TV giving us a full break-down of the mess left by Labour, and every speech, every austerity measure, and every reference to cuts made by the coalition over the next five years must begin with a statement like, "Because of the incompetence, ideologically driven policymaking, and gerrymandering of the last administration, the coalition is forced to announce that……"

    The alternative, a dissillusioned electorate returning a Balls or Milliband administration in five years time, is too awful to contemplate.

  3. Jonathan Tee
    June 6, 2010

    John, did you see the report that the Adam Smith institute posted on their website?

    Shows that the Treasury has had a consistent bias towards growth in forecasts since 2000. In other words they almost always call economic growth higher than it turns out to be.

    Inaccuracy is to be expected, but you would expect it to fall in both directions. Systematic bias suggests the statistical models are being 'improved' to show a rosier picture.

    1. Hugh
      June 7, 2010

      The Adam Smith Institute paper is interesting.
      It would be valuable, if the data is available, for them to increase the sample size to cover all years since the War.
      This would give (a) improved statistical accuracy, and (b) the possibility of comparing the Treasury's performance during different administrations both to detect bias (unlikely) and to bolster the case for increasing the 1/4% permanently.

  4. Acorn
    June 6, 2010

    I assume, when you use the term Red Book, you refer to the budget report that includes the Economic and Fiscal Strategy Report; and, the Financial Statement and Budget Report. If so, it will be interesting to see how Darling's forecast turns out.

    The Chapter 1: Overview, is worth a read at least. Table 1.1 has a little line in small print which says "Note: All measures are presented on the basis which excludes the temporary effect of financial interventions". I wonder if the person in the Treasury who wrote that, had a smile on his face at the time!

    PS. I am reading that certain bits of Treasury reports have to be redacted when the previous government leaves office and the new one takes over. What would you expect to be removed? Does that mean that the documents in the above link have been changed, to protect the guilty?

    1. Acorn
      June 6, 2010

      Additionally JR, could you please do a post on "M4 Lending". We had some good posts yesterday about where the QE money is going and the BoE buying the government's debt.

      In my teach-your-self economics plan, I have not got to grips yet with the BoE definitions of "broad" money supply. The graphs in the following BoE link seem to be going in the wrong direction for a recovering economy; I am unsure if this a problem or not. Needs a Banker to explain it please.

  5. APL
    June 6, 2010

    JR: "and the risky assets we are all still underwriting"


  6. Sally C.
    June 6, 2010

    When is the government planning to sell the 'good bank' version of Northen Rock? Will the government force Lloyds to sell Halifax Bank of Scotland in order to recoup some taxpayer cash? Is there any chance of selling at least part of RBS? What else can we sell?

  7. Brian Tomkinson
    June 6, 2010

    Labour ministers should be surcharged, (or other penalty-ed) for wilfully leaving the economy in such a mess. Instead they are going to be paid generous severance payments. At the very least the coalition government should stop these payments or tax them at 100%. Didn't Brown regularly say there should be no reward for failure? This isn't just failure it is vindictive irresponsibility, often carried out in the face of the expressed opposition of the civil service. If we’re all in this together, make an example of these people. They are already re-writing history and posturing that whatever decisions are taken about cutting public spending it is down to the coalition nothing to do with them. They are trying to convince people that their grubby hands are clean. Don‘t let them get away with it.

  8. Frank Salmon
    June 6, 2010

    One day we will live in reality. The differing baselines and shifting series are the most alarming part of your article, because it simply makes it impossible to compare things year on year. Of course if there was any good news, there wouldn't be the desire to obfuscate reality, so i presume Labour and its Ministry of Misinformation have been doing this for a long time. Lets hope that in the world of reality we collect all statistics; on crime, waiting lists, public expenditure, liabilities, accounts (particularly off-balance sheet), expenses, employment, inflation (RPI for instance), etc on a like for like basis. Then when we know where we are, we won't make the dreadful mistakes of the last government….

  9. Ex Liverpool rioter
    June 6, 2010

    When is our debt roll over likely to hit? I heard the BOE glibly talking about how our debt is long term & its Euroland that is funded by short term debt.

    How much time do we have?

    Reply: The average length of our debt is longer than many Euroland countries, but there is sitll substantial debt to roll over each year – around £50 bn from memory last year.

    1. Mark
      June 7, 2010

      There is now over £60bn of regular Treasury Bills (3, 6 and 9 month maturities when issued) that have to be re-financed on a continuous rolling basis – at the moment the longest maturity is 29 November, 2010. Details are available at the DMO site under Money Market – Treasury Bills Outstanding and Issuance (£62.419bn at end May – an increase of over £40bn since the financial crisis broke in summer 2007 and a less pubic increase than gilts borrowing, with £17.16bn re-financed in May alone). This excludes the special Treasury Bills that have been issued in support of the BoE's Special Liquidity Scheme and Credit Guarantee Scheme. These amounted to a further £319bn according to the CML a couple of months ago. These Bills nominally have 9 month maturities, but there are provisions to allow them to be rolled over until repayment dates under the schemes. Robert Peston reported that repayment due under these schemes, together with rolling over of wholesale funding, would mean banks needed to borrow £440bn in 2010-11, essentially to fund mortgage lending that is now £1,237bn. If banks can't fund the £319bn in commercial markets, it will be added to government borrowing, making the deficit projections seems tame.

      You can also find details of the redemption profile for Gilts at the DMO site (Gilts>Data>Gilts in Issue). That shows £21.285bn being repaid today, 7th June, with a further £6.72bn due in November, and £23.651bn due next March. In 2011/12 there is a total of £49.926bn in regular gilts due for redemption, along with an indexed linked gilt which at the current RPI would require about £14bn in repayment, but will probably be somewhat higher with another 15 months inflation. Total gilts in issue, including inflation uplift on index linked gilts, now amount to some £953bn.

      Ignoring off balance sheet borrowing, such as via PFI, that means there is already just over £1 trillion in borrowing outstanding. Assuming a deficit of around £150bn, that means we need to finance over £200bn this year, as well as rolling over the Treasury Bills about twice given average maturity. If the SLS and CGS have to be rolled into national debt, that will mean over £500bn of government borrowing. The idea that the markets would allow this to happen at low interest rates on a short term continuous rollover, or even permit the current low nominal rates on long term debt seems rather fanciful to say the least. It also somewhat undermines the idea that we are safe simply because of the maturity profile of gilts in issue. It is the gilts we will have to issue to finance our spending and off balance sheet borrowing in the CGS and SLS that should concern us.

      1. Mark
        June 7, 2010


        You should really add the £200bn of QE gilts held by the BoE as borrowing that hasn't yet been financed by third parties if you want to consider how much we might need to fund. Of course, if all this borrowing can only be funded via QE, we can expect the consequences in (hyper-)inflation.

      2. Ex Liverpool rioter
        June 8, 2010

        Thanks Mark

  10. Mike Stallard
    June 6, 2010

    A footnote to this thoughtful piece.
    In Australia, in order to encourage start up businesses, when people are self employed, they are allowed a tax holiday of 18 months. At the end of this period, they start to pay tax, and also they have to pay the tax, which they missed out on during the holiday, at the appropriate rate.
    During the 18 months, clever people build up a bank account which looks good when they go for a loan.
    You are so right: what we need is tax breaks and tax reduction, not endless "government initiatives" with all the useless quangos and bossy intervention from greedy poseurs. Too many people living off the taxes: too little export.

  11. Stuart Fairney
    June 6, 2010

    "public sector net worth has crashed from 70.9% at the end of the Thatcher period"

    Er, sorry to be stupid but 70.9% of what?


  12. IJ
    June 6, 2010

    So a £118 billion soent bailing out house owners excluding interest rates and QE and now you want the same second house owners to pay less tax than those who dont own a house. Very nice of you.

  13. Chuck Unsworth
    June 6, 2010

    Nicely encapsulated and utterly terrifying. Cameron is absolutely right to say that we're in for years of pain. High time for some very plain speaking from central government.

  14. alan jutson
    June 6, 2010


    You will remember I said many times, over many months, that when you get to see the books and the real figures, it will be worse than anyone thought.

    With businesses which go into receivership, or go bust, it is always, but always much worse than is made out at first.

    This is why it is SO IMPORTANT that the true state of UK PLC finances are published after a full and forensic investigation, by an independent source, for everyone to see.

    No one must escape being made aware of Labours total and utter mismanagement of our finances, and the reason why we now have to go through so much pain, for so many years, before we are back on track.

    The people involved in making such decisions (all past Cabinet Ministers in the last Government) should never be allowed to hold a position of influence in any Government ever again.

    1. John Wrexham
      June 7, 2010

      When you look at the CVs of your typical Labour politician, it's amazing anyone had any confidence in them running the economy in the first place! In fact, they probably only won that confidence in 1997 because of Britain's embarrassing exit from the ERM after a recession inducing attempt to stay tied to the deutschmark at too high a rate for far too long. Who should we blame for that mess as it is they who opened the door to Gordon Brown and his neo-endogeneous growth theory and no return to boom and bust nonsense!

  15. Nick
    June 7, 2010

    Bit mystified here – do you mean the Pink Book? I found the Pink and Blue books very useful for slaying europhiles.

    1. APL
      June 7, 2010

      "slaying europhiles."

      If used properly then, most of the coalition cabinet would have been subject to the 'pink book treatment'.

  16. forthurst
    June 7, 2010

    "That same 2010 Red Book revealed that public sector net worth has crashed from 70.9% at the end of the Thatcher period to 22.4% in 2008-9."

    Well, it sounds shocking, but what does it actually mean?

    What is says – wealth has been destroyed and borrowing surged. Net worth is assets minus liabilities – properties minus borrowings etc as % of GDP

  17. Andrew
    June 7, 2010

    Please delete my last posting. Submitted incomplete.

    Thank you

  18. nonny mouse
    June 7, 2010

    Can we rename it to the Blue book? Red sounds far too socialist, which is probably why it isnt very usefull.

    1. nonny mouse
      June 7, 2010

      Oops, forgot our yellow friends. "Blue with a yellow stripe book"? Just making the cover yellow and the writing blue might work.

      1. alan jutson
        June 7, 2010

        Keep it as Red until we are in credit.

        1. nonny mouse
          June 7, 2010

          Nice one.

          Although we are missing an opportunity to make some money here.

          Red book sponsored by Orange?

    2. Acorn
      June 7, 2010

      You nonny, there is a Blue Book already 🙂

  19. Josh
    June 8, 2010

    There is spin on concepts as well. 'Transfer payments' have become 'social protection.'

  20. christina sarginson
    June 15, 2010

    I hope you are not suggesting in this blog that forecasting is reality when done by the new government; anyone knows that this practice is exactly what it says only predicting what might happen when looking back at the past. When I have been writing business plans for the future growth of business it is only ever a guess which will hopefully come to fruition. Is this not the reason why the new economist are making suggestions that we have been doing it wrong for many years. As uncomfortable as this is we may have to look again.
    With regard to the red book, a know a lot of people who think that quantity is quality, I watch with interest as the what the new government do!!!

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