Gladstonian Daftness?

At the AGM in Wick on 18 June, FoFNL President John Thurso MP raised an interesting point about how Government makes decisions about spending. He explained that the Treasury has - since the 19th century - looked only at the cash amount needed to fund a piece of work. In the context of infrastructure spending - not just on the railway - this leads to a serious misallocation of resources. Any business deciding to invest in new plant or equipment spends cash on one side of the Balance Sheet but acquires an asset of equal initial value on the other. The asset - a factory, say - has a long productive life, but will gradually consume more cash for its upkeep and eventual replacement. So the asset is written down year by year in the Balance Sheet over a period roughly equal to its estimated life. A decision to build a new factory thus looks not only at its cost, but at the value to the business of using the factory to produce goods over several decades. The pros and cons are examined and a decision - to build or not - is taken having regard to the whole picture.

That description will be familiar to every business person and, I guess, familiar in broad concept to most householders as well.

But for historic reasons HM Treasury resolutely refuses to make spending decisions in that way - the wise way. The focus is only on the cost and the idea that a public asset - a bridge, say, or a hospital - needs to be paid for out of current revenue has acquired shibboleth status. For this reason curious strategies like the PFI have been introduced (by both main parties at Westminster). Whoever is Chancellor, the Treasury's thinking dominates.

John Thurso contended that this leads to bad decision-making. Interestingly the Government of New Zealand introduced proper balance-sheet-style public accounting nearly 30 years ago, and economists generally agree that this single act heralded a much better use and allocation of public resources there. The New Zealand economy, which had been a very poor performer in the decades before then, improved and is now regarded as a model for other small developed countries to follow.

But "not invented here" is a familiar excuse heard in Whitehall. What a shame!