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The perils of Tony Blair’s private finance fixation

With just eight months to go before the next General Election some of the self-assuredness in Tony Blair’s step appears to have gone. Despite a widely praised speech to City grandees recently, Labour has suffered a number of embarrassing gaffes over the summer. Its policies on devolution and the trade unions have unravelled after a series of poorly presented U-turns, while an appearance of unity has been clouded by the spectacle of leading shadow cabinet members, if not in open argument, then certainly snarling at one another.

However, this is small beer compared with the hefferlump trap that awaits Labour around the corner in the shape of the public finance initiative (PFI).

Tony Blair and his colleagues are pinning their hopes on this particular piece of financial engineering to get them off the “tax and spend” hook, particularly where it relates to big capital projects. But, unfortunately, the party’s expectations of PFI’s prospects have become unrealistically overblown. It now hopes to rescue this faltering Tory initiative with a new set of “practical proposals”. These include setting out clear priorities, better training for civil servants and the involvement of more City experts to negotiate deals.

But it is on the complex issue of risk apportionment where the rethink remains almost fatally flawed. Labour hopes to attract more private sector cash to PFI by spooning some of the risk back onto taxpayers. Not only does this negate one of the main principles of PFI: that risk should be borne by those who best manage them but it also undermines the reason for taking the debt off the public sector’s balance sheet in the first place. Any private company that tried to pull the same stunt with say, its finance leases, would be rightly excoriated.

In short, Labour finds itself in a similar dilemma as the Government. Desperate to find ways of promoting expenditure on public services but terrified of incurring the wrath of the bond markets. Unless it can square this circle by the time it takes office then the party is riding for a very big fall.

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