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Was Carillion the canary in the coal mine?

The news over recent weeks has been punctuated by worries surrounding three Cs: Carillion, Capita and a stock market Correction.
12 highlights from 2022

The news over recent weeks has been punctuated by worries surrounding three Cs: Carillion, Capita and a stock market Correction. Central bank policies of the past decade have played a key role in all of them.

Even in today’s hyperspeed news cycle, the collapse of Carillion looks like it will be remaining in the headlines for longer than its execs had hoped.

This is because Carilion is emblematic of a wider issue – the absurd manner in which the British state has been paying for the things we need for over two decades.

Since the early 1990s, governments have increasingly relied on private finance initiative (PFI) deals as a simple accounting trick to pay for public goods like hospitals and infrastructure, without increasing the liabilities on the public balance sheet. As both the International Monetary Fund and Office for Budget Responsibility have pointed out, such policies are merely a ‘fiscal illusion’. PFI has the magic of allowing the government to deliver necessary investment, without committing the taboo of increasing borrowing figures.

While this may sound like a benign idea in theory, in reality it has led to governments essentially outsourcing borrowing to firms like Carillion and Capita, and paying a premium for it.

At the root of this debacle is the prevailing ‘wisdom’ that government finances function in a similar manner to household finances. As the myth goes, the government can only spend what it ‘earns’ through taxes, and has to break the cultural taboo of borrowing if it wishes to ‘live beyond its means’. Yet at the same time private companies are free to rely on borrowing in order to invest and grow.

As a private company, Carilion didn’t suffer from the same arbitrary constraints governments have imposed on themselves when it comes to borrowing. Its business model was based on taking advantage of ultra-low interest rates to raise capital to outsource public services on the government’s behalf, before charging the government eye-watering interest rates for the privilege, without taking on any risk.

For instance, PFI moguls like Carillion were able to borrow at around 6 percent to pay for the building of a new hospital, and then charge the government rates of 15 percent, without the company itself laying a single brick

As the IPPR’s Grace Blakeley points out, companies like Carillion don’t actually provide the public services themselves. They are a third party which simply manages contracts with construction firms and suppliers. Far from being a model of private sector efficiency and innovation, Carillion execs burdened public finances by profiteering from their provision of a socially useless additional layer of bureaucracy. It’s not hard to see why people are calling such a model a Ponzi scheme.

But there is also a worrying relationship between the Carillon scandal and the policies of the Bank of England.

While governments have cut back on spending and told the public that there’s “no magic money tree”, the Bank of England has quietly created hundreds of billions of pounds through QE. The money created through this process goes directly into financial markets, flooding them with liquidity in a bid to get them investing.

But unfortunately there is more money than markets know what to do with. Not only has this led to asset price inflation, but it has also driven unproductive and riskier investments. The huge supply of cheap money fuelled by QE combined with a decade of ultra-low interest rates has led to the rise of so-called ‘zombie firms’ – unproductive companies which have been kept alive by propping up their finances with cheap credit. Zombies might be able to meet interest payments, but they can never repay the principal. They just have to keep taking on new debt.

Carillion is just one of these zombie firms. As interest rates continue to rise and the Bank of England inevitably winds down its QE programme, the life support will be switched off for many other companies, including a number of others who have been skimming profits from PFI deals. Carillion could have just been one of the canaries in the coal mine.

We are now seeing a similar phenomenon play out on a global scale, with record-breaking bull markets experiencing an inevitable fall. Stock markets, which have been propped up to record highs by QE’s asset inflationary effect, are beginning to feel the biteback as central banks move to withdraw stimulus. Investors are nervous that their assets will no longer thrive without monetary support, so are jumping to sell overvalued stocks.

The scenarios that Positive Money and others have long been warning about may be closer than anticipated.

Time for a new approach

The silver lining from all of this is that it presents us with an opportunity to fundamentally rethink the way we pay for public services, and the other things society needs.

As an underfunded NHS is forced to pay 2 percent of its budget on PFI repayments rather than hospital beds, it highlights just how dangerous the prevailing ‘common sense’ on public finance has been.

But there are real alternatives to PFI.The government has the ability to finance investment by borrowing directly from the Bank of England at its base rate (currently 0.5 percent), allowing them to borrow at cheaper rates than any private company, including the likes of Carillion and Capita.

Even better, governments could do away with unnecessary interest payments altogether. Instead of creating money to spend on financial markets, we could implement ‘QE for People’, in which the QE mechanism would be used to invest straight into the real economy, by giving the government funds they could spend on the hospitals, housing and green infrastructure we need.

With the housing crisis and A&E waiting times worse than ever, there are better ways we could be using the power of money creation than propping up an asset bubble which, as we are beginning to see, will come back to bite.


AccountingcrisisInterest ratesPublic Money CreationQEQE for Peoplequantitative easing

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