Only a couple of days left until the Budget and the airwaves are already thick with speculation about probable measures in Alistair Darling's first major set-piece.


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* The smart money is on some kind of new levy on energy companies; higher taxes on binge drinkers of every saturation and a plan to kitemark mortgage debt.

However, with so little room for manoeuvre, few of these measures amount to anything more than fiddling around the edges. The real story this week concerns the public finances.

In short, they have deteriorated to such a degree that the Treasury has next to no ammunition if it needs to drag the economy out of a possible recession. Still more worrying is the fact that a true, comprehensive picture of the national accounts is one thing guaranteed not to make it into the 2008 Budget.

The official picture painted of the public finances will not be a comprehensive assessment of what the Government now owes.

We already know that Mr Darling is likely to exclude Northern Rock's estimated £100bn of liabilities from the UK's net debt tally.

Small wonder, given that this would, in one fell swoop, shatter his sustainable investment rule, which stipulates that the national debt must not surpass 40pc of GDP.

According to the most recent Treasury sums, by the end of this month net debt will hit £542bn, or 37.6pc of GDP. It has been climbing sharply since 2002, when it hit a low of 29.8pc, thanks to austere Conservative spending plans and a big windfall from the auction of the 3G mobile network licence.

Adding Northern Rock's debts would catapult the debt proportion to a massive 44pc - a highly embarrassing eventuality for a Chancellor whose credibility has been severely dented by blunders.

However, this is only the tip of the off-balance sheet iceberg. There are other debts in the shadows, and until recently that was where they seemed destined to stay.

But even if they stay out of this year's Budget, there are growing signs that these massive debts, which dwarf the existing deficit, may soon be forcibly dragged into the national accounts.

The two biggest off-balance sheet unmentionables are the debts from the Private Finance Initiative and the liabilities of the public sector pension scheme. At a combined size of well over £800bn, these massive debts would bring the total national debt to well over 100pc of GDP. And two independent committees based in London and New York are busy discussing how to bring them on to the balance sheet.

It's a change that is long overdue, according to Martin Weale of the National Institute of Economic and Social Research. For many years, analysts have assumed that the Government uses the PFI scheme, in which it signs up to a long-term contract with private sector companies for services such as hospitals, largely to keep certain debts off its books.

Given that the present discounted value of these projects now amounts to a Northern Rock-style £110bn chunk, the Financial Reporting Advisory Board is now putting pressure on the Government to bring them back on-balance sheet.

Says Weale: "The PFI is essentially funny money as far as I can tell, and projects on it ought to be kept on the same financial footing as government borrowing. In principle, public liabilities are liabilities whether you build a hospital that you are going to pay for today or in the future."

Their inclusion would mean breaking the sustainable investment rule, even before you think about including Northern Rock. However, this is hardly a disaster, according to Weale.

"The Chancellor's 40pc limit is an arbitrary number, and that's one of the problems with the framework." The real problem is not the absolute level of debt but the possibility that international investors think the government has become permanently profligate.

"The other [problem] is that Mr Brown has refused to countenance breaking the rules. The key thing is not to boast when you meet the rules but to explain how you would right things if you break them."

But, before the Treasury considers notching up the limit, it would do well to take account of the biggest elephant in the public finances room.

For there is a massive £700bn public sector pension deficit. State workers' retirement benefits are not paid out of a pot of investments, but out of the current budget. But, as pensions are a type of salary, argues Carl Emmerson of the Institute for Fiscal Studies, it makes sense to put them into the national accounts today.

"It seems right that the wages of today's public sector workers, and also their pensions, should be paid for today, rather than deferred for future generations to pay," he says. "For instance, the Government has been very worried about keeping public sector pay awards low - but not the pension. If the pension liabilities were in the books, it might give them an incentive to sort it out sooner."

A little-known UN committee is expected to recommend later this year that governments put these pension deficits on to their books. But they are likely to be ignored on Wednesday.

It is a sign of the Treasury's attitude to them that, despite promising last year to produce an estimate of the public sector pension deficit by late 2007, it has so far failed to publish a definitive figure.

All a Treasury spokesman will say is: "As Alistair Darling told Parliament, there will be an assessment of the UK's fiscal position provided in the Budget. We are meeting our strict fiscal rules and will continue to do so."

The plan seems to be to bombard MPs and the public with so many new initiatives that no one pays much attention to the state of the public finances. And Mr Darling is well-placed to do so. Even before he has added his measures to the pot on Wednesday, the ones due to come in in April will make this the busiest year for accountants in all of Labour's 11 years of power.



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