THE Government’s borrowing rules were under threat yesterday after crisis-hit Northern Rock’s liabilities were taken on to the public balance sheet.
Feb 8 2008 by Sam Wood, The Journal
The Office for National Statistics (ONS) said the move could add at least £90.7bn to public sector debt, based on Northern Rock’s 2006 accounts.
This would put the Treasury in breach of its sustainable investment rule – which dictates that debt should not be more than 40% of GDP.
While the ONS said the exact impact could not be stated, it indicated Northern Rock could add 6.7% to the key measure, which stood at 37.7% in December – leaving the benchmark well above the Government target at 44.4%.
Northern Rock’s estimated £24bn funding bail-out from the Bank of England is not expected to be on the debt figures as it will appear on the Bank’s books as an asset.
Liberal Democrat Treasury spokesman Vince Cable said: “This announcement means the Government will have to be honest about the huge debt that taxpayers are currently owed.
“This move shows the benefits of increased independence for the ONS. Today’s decision will help us make an informed judgment about the future of Northern Rock.
“The impact on the national accounts may prove embarrassing, but at least in the short term it ensures that the Chancellor can’t use his absurd bonds proposal to hide the true impact of bailing out Northern Rock.
“We must now have a rational debate about who should own Northern Rock – ensuring that all taxpayer loans are repaid with interest.”
Northern Rock suffered the first bank run in more than 140 years last September after the company’s borrowing costs soared in the credit crunch.
The ONS said the Newcastle-based lender would be classified as a “public financial corporation” from October 2007 – although it stressed that this should not be confused with nationalisation.
It said: “The decision is based on a judgment that the public sector has the power to control Northern Rock’s general corporate policy.”
A Treasury spokesman said: “As the Chancellor has said, any impact would be temporary and exceptional, and the Code for Fiscal Stability has provisions for such situations.
“We will report on the fiscal position and our assessment of performance against the fiscal rules at the Budget in the usual way.”
Sources added that Northern Rock’s liabilities were backed by a high-quality loan book despite the temporary impact on the public balance sheet. The Government’s sustainable investment rule aims to protect future taxpayers from heavy debt burdens.
But Conservative MP Michael Fallon, a member of the Treasury select committee, said the ONS decision had “completely blown the gaff” on the Government’s handling of Northern Rock. He said: “The ONS is saying Northern Rock is now publicly controlled. The Chancellor has completely shattered his fiscal rules and the taxpayer will be paying for this incompetence for the next three years.”
Despite a worsening outlook for the public finances as economic growth slows, economists said the exceptional circumstances surrounding Northern Rock were unlikely to alter Government spending plans.
JP Morgan chief economist Malcolm Barr said: “The 40% limit is rather arbitrary, and we strongly suspect the Chancellor would raise or redefine it rather than change current spending and tax plans in order to abide by it.”
Two teams – a consortium led by Sir Richard Branson’s Virgin and Northern Rock’s own management – are in the running to take on the crippled lender. A third contender, investment firm Olivant, pulled out of the race on Monday and nationalisation could await if the private sector rescue bids founder.
