Will North pay price of rescuing the banks?

Oct 9 2008 by William Green, The Journal

GORDON Brown's £500bn gamble with taxpayers’ cash to save British banks could spark public spending cuts in the North, it was said last night.

The warning from financial experts, business chiefs and politicians came after the Prime Minister refused to give The Journal a “cast iron guarantee” that his historic bank bail-out would not affect regional public spending.

The North East relies heavily on the public sector, which directly accounts for at least a third of the region’s jobs.

But fears of a squeeze are growing with the Government set to borrow more to rescue banks. The Treasury will inject up to £50bn into UK banks for a stake in them, hoping that could eventually return a profit, and underwrite £250bn of inter-bank lending.

A Bank of England scheme ensuring banks have enough cash to operate will be extended to “at least” £200bn as institutions remain unwilling to lend amid uncertainty about bad debt.

Yesterday’s announcement contrasts with the £20bn of public cash allocated to the North East and the £454bn total spent nationally in 2006-07.

Asked by The Journal for reassurances yesterday, The Prime Minister said: “I think our record on public spending in the North East is one of which we can be very proud, increasing expenditure on housing, on health, on education and social services.

“And we have set out our plans for the next three years and I believe that the regional development agencies are injecting more money into the North East.”

But senior Newcastle councillor Greg Stone said: “We are already seeing money being cut from the RDA budget to pay for the cost of the economic crisis. We are seeing money being flitted away on the Olympics.

“At a local authority level we have already been making significant efficiency savings over the last four to five years without hitting frontline services. That cannot continue indefinitely.”

The Liberal Democrat added: “The Government is already increasing its borrowing way beyond usual limits and there is a real fear that the Government is running out of cash.

“I fear that we will see a significant shrinking in regional spending allocations.”

Hexham Conservative MP Peter Atkinson said the rescue package was inevitable as banks were crucial to oiling the economy, but said: “This is bound to reflect itself in public spending.”

Chris Leslie, director at the New Local Government Network think-tank, said ministers had little choice about taking action, but foresaw constrained borrowing – despite that being used to invest in areas such as housing.

“Some of this financial settlement is definitely going to ripple across all sorts of elements of public service delivery,” the former minister said.

Peter Jackson, Tory leader of Castle Morpeth Borough Council and a board member of development agency One NorthEast, said local government was “creaking at the seams”.

He said One NorthEast was facing year-on-year cuts of 5% on top of a recent £34m raid on its budget.

But Regional Minister Nick Brown said the package would help North East firms find funding and improve their order books.

He said: “The economy in the North East is heavily reliant on the public sector. I believe in public services and I am very protective of the sector.

“However, the key to driving up the prosperity of the region and protecting it through difficult times is to ensure that the big private sector infrastructure projects that are coming on stream remain on track.”

Chancellor Alistair Darling said: “The implications for the public finances as a result of today’s announcements will be exceptional, and mostly temporary.”

I think our record on public spending in the North East is one of which we can be very proud.