Northern Rock ‘may aid public finances’

Mar 12 2008 by William Green, The Journal

NORTHERN Rock could actually improve the public finances rather than dent them, according to experts.

The assessment from the respected Institute for Fiscal Studies comes as Chancellor Alistair Darling is today expected to report on how nationalisation of the bank has affected public finances.

In his first Budget, Mr Darling may set out how the Government intends to treat the bank in terms of public debt, which could have an effect on wider spending plans. As Chancellor, Gordon Brown decreed public borrowing should not go above 40% of national income, but that “golden” rule was broken when the Office for National Statistics ruled Northern Rock must go on the public books.

The move means about £100bn is likely to be added to the nation’s debt, although the impact could be minimal even if it is acutely embarrassing for the Government.

National debt stood at £536.5bn – or 37.7% of national income – last December, but reclassification pushes that to about 45% of national income, says the IFS.

But public debt rises only in the short term because it does not include Northern Rock’s mortgage book, rated as “high quality” by watchdogs.

The IFS says: “When Northern Rock or its mortgage book is sold, this should offset a large part of the increase in public sector debt. It is even conceivable that the net debt will end up lower than it started.”

It stresses the ONS classification of Northern Rock makes no difference to taxpayers’ overall exposure of about £55bn – through a £25bn direct loan and £30bn of guarantees to savers. “But in practice, all or most of this exposure should be recoverable from the sale of Northern Rock’s assets, in particular its mortgage book,” says the IFS.

The Government may also have “wriggle room” over its undefined fiscal rule as it relates to the “current” economic cycle, after the Prime Minister said the country was entering a new period earlier this year.

Its code for fiscal stability means it can depart temporarily from current policy as long as it sets out the reasons as well as the approach and period of time the Government intends to take to return to previous fiscal rules.

Ministers must also set out the fiscal policy objectives and operating rules that will apply over the period.

The IFS says the Treasury can and should modify its rules for the period that Northern Rock has a temporary effect, but stresses the key considerations are what is best for taxpayers and long-term stability of the banking system. And while there is nothing sacrosanct about the rule, the IFS says its spirit could be retained by aiming to keep public sector debt below 40% of national income, excluding the impact of Northern Rock.

But ultimately, any long-term effect on tax and spending decisions depends on Northern Rock’s future being resolved once and for all.

North East Minister Nick Brown said: “The likelihood is that it will turn out to have been an asset, not a liability to the public finances.”

Northern Rock was a good investment for the Government as money lent was on competitive rates of interest and cash would be secured upon sale of the bank, said Mr Brown.

Alan Duncan, Tory shadow Tyneside Minister, said Mr Darling would “fudge” the rules as he blasted Mr Brown’s record as Chancellor.

“He has mortgaged the country for him to become Prime Minister,” said Mr Duncan.

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Cash for shares to be fair, says Eagle

THE Government yesterday insisted plans to compensate Northern Rock shareholders were fair as it remained unclear when and if they would get any money after nationalisation.

Treasury Minister Angela Eagle was forced to defend the arrangements as MPs challenged their basis. There were claims shareholders would get very little or no compensation as a parliamentary order creating the new system was approved last night.

The Government wants to appoint an independent valuer to determine compensation, based on the assumptions of Northern Rock being in administration and not a going concern, which Opposition MPs say is not the case.

Shareholder groups fear such a system is “rigged”, although Ms Eagle insisted it was fair because Northern Rock would have collapsed without Government support.

But Hexham Conservative MP Peter Atkinson questioned the arrangements as a Commons committee examined the proposals, saying he had received a letter from an 80-year-old widow with shares.

“The question that she and many others are asking is why, if you want to get a fair valuation, is the valuer being told to assume that the company is unable to continue as a going concern and that it is in administration, when clearly it is a going concern and is clearly not in administration?”

But Ms Eagle said: “Any compensation must be fair, it must not overvalue Northern Rock on the basis of public support and without that support Northern Rock would not be able to continue as a going concern – it would be in administration.”

Ms Eagle also brushed aside calls from Berwick MP Alan Beith that the independent valuer should consider the failings of the Financial Services Authority in regulating Northern Rock.

“It is not the FSA that runs banks,” said Ms Eagle.

The minister declined to give a clear timetable on how long the process to decide compensation would take, saying: “I don’t intend today to second guess a valuer who hasn’t even been appointed.”

She also appeared to admit that a court challenge to the compensation system was possible, but insisted shareholders and the Treasury would have plenty of opportunities to challenge the valuation of shares.