Darling gearing up for the great PFI bailout

The Daily Mail reports that Darling is about to set up a quasi-bank to finance cash strapped private finance initiative (PFI) projects.

Although the details of each PFI are often complicated, the basic idea is simple enough. The government encouraged private sector firms to build schools, hospitals and roads. In return, the government agreed to pay an regular user fee, which allowed the private sector firm to recoup the construction costs.

These payments are scheduled to continue for decades. This has allowed New Labour to accumulate new infrastructure without any immediate increase in the public sector debt stock. In other words, PFI generated liabilities without formally creating any debt.

Recently, the scam has run into trouble. The credit crunch created financing difficulties, with many uncompleted developments running out of cash. This has forced Darling to use public money directly to prevent projects from collapsing.

Apart from being devious, PFI is fiscally dangerous. Since the government is contractually obliged to pay for the services offered by PFI schemes, it makes it extremely difficult for the government to cut expenditures in the future. Thus, PFI guarantees huge future increases in taxes.

PFI is pure New Labour - "give it to me now, and I'll pay for it later". As a consequence, Brown and his mates are now accumulating future liabilities at such a rapid rate that the long term financial viability of the UK government is now in doubt.