Bailed-out banks to add £1.5 trillion to public debt

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Alistair Darling on BBC’s Newsnight:

“The problem was that last October the banking system was facing imminent collapse,” he said. “We had no alternative but to intervene quickly.We had a matter of days and then hours to stop the entire banking system collapsing. Since then many other countries have done the same thing. The alternative was to let HBOS go down and last October [at such a critical point] the damage would not have stopped there.”

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Prepare yourself! Do not rely on your government and the Bank of England.

Royal Bank of Scotland and Lloyds TSB, the two banks bailed out by the Government, are to add between £1 trillion and £1.5 trillion to the public debt, the equivalent of between 70 and 100 per cent of GDP, the Office for National Statistics indicated this morning.

Britain’s public sector net debt is already a record high, hitting 47.8 per cent of GDP in January, official figures show. This is the highest level of debt recorded since the ONS started recording data in 1993.

The ONS said that it had decided to add the banks to the Government’s books because “the Government has the ability to control the respective banks’ general corporate policy through the conditions associated with the agreements signed relating to recapitalisation.”

However the dismal figures do not paint the whole picture, as all the liabilities of the banks are added to the public books, and only the liquid assets are taken into account. The capital assets are not included.

The ONS said this method was used to reflect the extent to which the Government could cover its debts by realising its assets in the short-term.

Howard Archer, of IHS Global Insight, the economic consultancy, said: “Given the rate at which the UK public finances are deteriorating and new measures are having to be introduced to try to support the financial sector and the economy, it is frankly anyone’s guess as to how high the public deficits may go over the next couple of years.”

The massive debt will cause problems for the Government, which has already seen Northern Rock’s debts added to its accounts. Analysts said that it would probably have to revise up its borrowing forecasts in April’s budget.

Andrew Goodwin, Senior Economic Adviser to the Ernst & Young ITEM Club, said: “We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget.”

This came as the public finances deteriorated further in January. January is usually a strong month for tax income but the public sector repaid a net £3.3 billion over the month, well below £13.9 billion a year earlier, the ONS said.

Between April 2008 and January 2009, the public sector recorded a deficit of £42.5 billion. At the same stage of the 2007-08 financial year, a deficit of £7.0 billion had been recorded.

Mr Archer said: “The public finances for January are terrible, coming in even worse than feared. January always sees a surplus on the public finances at is a bumper month for tax receipts.

“Unfortunately though, bumper hardly describes the tax receipts for this January as they have been decimated by sharply contracting economic activity, declining profitability, rising unemployment, reduced bonus payments, December’s VAT cut and substantially weakened housing market activity and prices.”

Tax receipts have slumped by 11 per cent as a result of the downturn, with income tax receipts falling 3 per cent compared to January 2008, VAT down 11 per cent and corporation tax receipts down 21 per cent.

February 19, 2009
Grainne Gilmore

Source: Times Online

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