£91bn Northern Rock debt is public liability
Christine Seib, Grainne Gilmore and Greg Hurst
Gordon Brown’s reputation for prudent economic management was dealt a blow yesterday after an estimated £91 billion of debt from Northern Rock, the troubled bank, was moved on to the Government’s balance sheet.
Shifting the bank’s entire debt, which could grow to as much as £100 billion once calculations are complete, on to the public sector balance sheet will shred the Prime Minister’s “golden rule” that government debt should represent no more than 40 per cent of national income. Experts said last night that the debt had now risen to 45 per cent.
Northern Rock was forced last September to borrow an estimated £25 billion from the Bank of England, forcing the central bank to take control of the Rock’s activities. As a result, the Office of National Statistics said yesterday that Northern Rock must be classified as part of the public sector.
In the longer term, the increased debt could lead to higher taxes or reduced government spending, analysts said.
The Conservatives seized on the development, saying the breach of Mr Brown’s so-called fiscal rule to match borrowing with Government revenue over an economic cycle, undermined his entire economic record.
George Osborne, the Shadow Chancellor, said the figure was the equivalent of £3,000 for every family.
Mr Osborne said: “Gordon Brown has staked his reputation for competence on meeting his own fiscal rules. Today those rules have been blown to pieces as a result of his economic incompetence.
“Gordon Brown has effectively saddled every taxpayer with a second mortgage as a result of his mishan-dling of the Northern Rock crisis.”
Economists also described the debt transfer as “embarrassing” and “politically difficult”. It is likely to fuel criticism within the City of the Treasury’s handling of the Newcastle-based bank’s near-collapse last year.
The Institute for Fiscal Studies (IFS), the think-tank, said that Northern Rock’s debt was equivalent to about 7 per cent of national income and its inclusion of the public sector balance sheet would push government debt to about 45 per cent.
Robert Chote, director of the IFS, said: “[It will] shatter Gordon Brown’s pledge of keeping it below 40 per cent of national income.”
Howard Archer, the chief UK economist at Global Insight, the financial analyst, decribed the increased debt as embarrassing for the Prime Minister. “The truth of the matter is that the golden rules have been so battered in recent years that they have limited credibility,” Mr Archer said. “Northern Rock just won’t go away for the Government, and this move only adds to their embarrassment.” The debt transfer will be backdated to October but will not appear on the Government’s balance sheet until March.
The Government is expected to point out that, despite the additional £91 billion of debt, it had not breached its code for fiscal stability, which allows the Government to depart from the golden rules, so long as it spells out why it is doing so, how long the rules will be bent and what new rules that will apply.
But economists gave warning that, if the debt stays on the Government’s books for a long time, it could lead to an increase in taxes or a cut in government spending.
Jonathan Loynes, an economist at Capital Economics, the research house, said: “If this leads to increased concerns over the UK’s public finances, then there’s a danger that the cost of borrowing for the Government might rise, which in turn could lead to higher taxes.”
Even if the Government offloads Northern Rock on to a private bidder, the bank’s £25 billion Bank of England loan will take at least three years to be paid off.
A consortium led by Sir Richard Branson’s Virgin Group and a team of Northern Rock executives are fighting for control of the bank. The Treasury is expected to decide the winning bidder by the end of this month, in time to present its solution on the bank’s future to the European Union in March. The bidders submitted their offers on Monday and the Treasury is believed to have come back to them to suggest adjustments to their proposals.
A source close to the auction said that there were “no right or wrong answers” that would seal the deal for one party or another, but that the Treasury must weigh up which bid offered the best result and the least risk to taxpayers.
“There are two different proposals and they each have different risks and different rewards,” the source said.
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Ok, £91 bln for overinflated "assets", for this money UK could have build real high speed railways like in Japan and still have plenty of billions left - I think last time I checked cost estimate for Japanese style railways was around £25-30 bln
Christine Seib, Grainne Gilmore and Greg Hurst
Gordon Brown’s reputation for prudent economic management was dealt a blow yesterday after an estimated £91 billion of debt from Northern Rock, the troubled bank, was moved on to the Government’s balance sheet.
Shifting the bank’s entire debt, which could grow to as much as £100 billion once calculations are complete, on to the public sector balance sheet will shred the Prime Minister’s “golden rule” that government debt should represent no more than 40 per cent of national income. Experts said last night that the debt had now risen to 45 per cent.
Northern Rock was forced last September to borrow an estimated £25 billion from the Bank of England, forcing the central bank to take control of the Rock’s activities. As a result, the Office of National Statistics said yesterday that Northern Rock must be classified as part of the public sector.
In the longer term, the increased debt could lead to higher taxes or reduced government spending, analysts said.
The Conservatives seized on the development, saying the breach of Mr Brown’s so-called fiscal rule to match borrowing with Government revenue over an economic cycle, undermined his entire economic record.
George Osborne, the Shadow Chancellor, said the figure was the equivalent of £3,000 for every family.
Mr Osborne said: “Gordon Brown has staked his reputation for competence on meeting his own fiscal rules. Today those rules have been blown to pieces as a result of his economic incompetence.
“Gordon Brown has effectively saddled every taxpayer with a second mortgage as a result of his mishan-dling of the Northern Rock crisis.”
Economists also described the debt transfer as “embarrassing” and “politically difficult”. It is likely to fuel criticism within the City of the Treasury’s handling of the Newcastle-based bank’s near-collapse last year.
The Institute for Fiscal Studies (IFS), the think-tank, said that Northern Rock’s debt was equivalent to about 7 per cent of national income and its inclusion of the public sector balance sheet would push government debt to about 45 per cent.
Robert Chote, director of the IFS, said: “[It will] shatter Gordon Brown’s pledge of keeping it below 40 per cent of national income.”
Howard Archer, the chief UK economist at Global Insight, the financial analyst, decribed the increased debt as embarrassing for the Prime Minister. “The truth of the matter is that the golden rules have been so battered in recent years that they have limited credibility,” Mr Archer said. “Northern Rock just won’t go away for the Government, and this move only adds to their embarrassment.” The debt transfer will be backdated to October but will not appear on the Government’s balance sheet until March.
The Government is expected to point out that, despite the additional £91 billion of debt, it had not breached its code for fiscal stability, which allows the Government to depart from the golden rules, so long as it spells out why it is doing so, how long the rules will be bent and what new rules that will apply.
But economists gave warning that, if the debt stays on the Government’s books for a long time, it could lead to an increase in taxes or a cut in government spending.
Jonathan Loynes, an economist at Capital Economics, the research house, said: “If this leads to increased concerns over the UK’s public finances, then there’s a danger that the cost of borrowing for the Government might rise, which in turn could lead to higher taxes.”
Even if the Government offloads Northern Rock on to a private bidder, the bank’s £25 billion Bank of England loan will take at least three years to be paid off.
A consortium led by Sir Richard Branson’s Virgin Group and a team of Northern Rock executives are fighting for control of the bank. The Treasury is expected to decide the winning bidder by the end of this month, in time to present its solution on the bank’s future to the European Union in March. The bidders submitted their offers on Monday and the Treasury is believed to have come back to them to suggest adjustments to their proposals.
A source close to the auction said that there were “no right or wrong answers” that would seal the deal for one party or another, but that the Treasury must weigh up which bid offered the best result and the least risk to taxpayers.
“There are two different proposals and they each have different risks and different rewards,” the source said.
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Ok, £91 bln for overinflated "assets", for this money UK could have build real high speed railways like in Japan and still have plenty of billions left - I think last time I checked cost estimate for Japanese style railways was around £25-30 bln
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