Banks add £1 trillion to National Debt

The Office for National Statistics (ONS) said it would list the debts of both part-nationalised banks on the UK's balance sheet, adding between 1 trillion – one thousand billion – and 1.5 trillion to public-sector net debt.

The Conservatives said the figures made the Chancellor Alistair Darling's last Budget forecast look "ridiculous" – and would force him to recalculate his preparations for this April's speech.

The SNP said the data showed the recession was going to be far deeper than previously thought.

The sum of 1.5 trillion is roughly equivalent to the annual value of the UK's economic output, meaning that the overall debt will hit about 147 per cent of gross domestic product later this year. Debt was last at this level in 1954, when Sir Winston Churchill was in his second term as prime minister.

Adding the bank liabilities to the UK's books means every British citizen has a nominal debt of 36,666. It could push total debt to 2.2 trillion.

Kenneth Clarke, the shadow business secretary, said: "We are beginning to go off the Richter scale in terms of the British experience (of debt]. Last year's Budget forecast now looks ridiculous."

Philip Hammond, the shadow chief secretary to the Treasury, said: "This is just the beginning of Gordon Brown's debt crisis. Even on his own figures, our national debt is set to double to more than 1 trillion. This is the true legacy of the government's economic failures, and our children will be paying it off for a generation."

Stewart Hosie, MP, the SNP's Treasury spokesman, said the tax-take was being "hammered" by the economic crisis. "It is clear that the recession is going to be far deeper than previously thought."

The ONS's decision to include the banks' liabilities in its official analysis of net debt will not affect their day-to-day operations. But it is embarrassing for the Prime Minister, as it provides a dramatic illustration of the scale of the public's worst-case liability in the banks, following the 37 billion, taxpayer-funded recapitalisation. It could also weaken Britain's economic reputation among overseas investors.

The government currently holds a 68 per cent stake in RBS, and about 43 per cent of Lloyds Banking Group, which was formed following the takeover by Lloyds TSB of Halifax Bank of Scotland.

The ONS said it had decided to include both institutions in the national accounts because the government "has the ability to control the respective banks' corporate policy" following their recapitalisation.

The decision follows ONS rulings that Northern Rock and Bradford & Bingley, which were both fully nationalised to save them from collapse, would feature in the accounts. Vince Cable, the Liberal Democrats' Treasury spokesman, told The Scotsman that the ONS was right to classify RBS and Lloyds as being in the public sector, but wrong to ignore their assets.

Under the ONS's conventions, it counts only liquid assets and excludes capital assets – effectively giving a false picture of their current market value.

The ONS also announced yesterday that net debt as a proportion of the UK's GDP – essentially the size of Britain's economy – had risen to 47.8 per cent in January, compared with 42.2 per cent a year earlier. This means debt amounts to 703.4 billion – almost 100 billion more than a year ago. But while the 47.8 per cent figure is lower than December's peak, the dramatic year-on-year rise is highly significant, because January is a month when the government's finances are normally in rude health following an influx of corporation tax and income tax.

The figure also breaches the government's 40 per cent "sustainable investment rule" – although the Treasury refuses to count any of the bank bail-outs in its calculations and insists the underlying GDP ratio is now 40.4 per cent.

The latest figures gave a bleak analysis of the state of the UK's recession-hit public finances. Tax revenues plummeted almost 7 billion in January, compared with a year earlier, social security payments have jumped 1.8 billion and corporation tax receipts have crashed almost 25 per cent.

As a result, the government's net borrowing by the end of January stood at 67.2 billion – and is predicted by independent experts to hit 87 billion by April, well in excess of Mr Darling's 78 billion prediction.

The Treasury insisted Britain's level of debt was well below other developed nations, pointing to figures from the Organisation for Economic Co-operation and Development showing that Japan's was 90.1 per cent, Italy's 88.8 per cent, the United States' 52.6 per cent and Germany's 43.7 per cent.

The government's insistence that the bank recapitalisations should not be included in calculations of the percentage of net debt – because they are "temporary" investments from which the government hopes to make a return – is supported by the independent Institute of Fiscal Studies.

The IFS also said yesterday that the debt warning of 1.5 trillion was not a relevant figure for long-term tax calculations, as the final liability incurred as a result of the bank bail-outs was more likely to be about 120 billion.

"The important thing for the sustainability for the public finances is what the long-term impact on the public finances of the government's various interventions in the financial sector is, once the taxpayers' exposure has been unwound," it said.

Money talks, but gargantuan debt talks louder

WHAT can 2.2 trillion buy you? The figure is so staggering that most calculators will not take that many zeros.

Here is a shopping list that may give the huge public debt some context. It is the equivalent to:

Five Iraq wars (based on the assumption that it is costing 417 billion to date).

Pay for the United Nations for 137 years (on annual budget of 16 billion).

Buy 96,069,868,995 (billion) Big Macs (at 2.29 each).

Is nearly three times the size of Barack Obama's $787 billion US recovery plan.

Would build 523 new Forth crossings, left, at a cost of 4.2 billion each.

1.1 million Gordon Browns, based on his annual salary.

237 London Olympics based on an assumed cost of 9 billion, which could keep rising.

Q&A

Why are the partly nationalised banks being taken on to the public books?

Because the Office for National Statistics ruled that the government can dictate the terms of operation for RBS and Lloyds in exchange for being bailed out by taxpayers, and is so closely tied to their success or failure. The ONS estimates this will add between 1 trillion and 1.5 trillion to national debt.

Why is the figure so large?

It reflects the best guess-timate of the banks' current liabilities, but ignores their capital assets, which means the net debt is probably much lower than the ONS records.

What is happening with the public finances?

At the end of January, UK net debt stood at 703.4 billion, or 47.8 per cent of GDP. The figures include already nationalised Northern Rock and Bradford & Bingley, but not yet RBS and Lloyds.

What will it mean for the government's Budget?

The government will want to try to press ahead with fiscal-stimulus plans, possibly by way of tax cuts, despite the dire figures. It argues that there will not be long-term tax implications by taking these banks on to the public books, because it plans to sell them back into the private sector in the short term. This is backed up by the independent Institute for Fiscal Studies, which concludes that the banks should be stripped out of debt figures because they will eventually be sold. This leaves debt at 40.4 per cent, the highest since 1997-98.

What other factors are impacting upon the figures?

Tax revenues are falling with rising unemployment and falling profits. January is normally a good month, but the recession has taken hold. The public sector repaid net debt of only 3.3 billion over the month, compared with 13.9 billion a year ago. More benefit payments are also taking their toll. The ONS figures show the Treasury is running a deficit of 42.5 billion this year, compared with just 7 billion at the same stage last year.

How will the government pay back the debt?

It will issue more gilts and Treasury bills to investors. The government deals are triple-A rated – the highest – but there have been concerns this status could be downgraded unless firm action is taken on the public finances.

How will this affect ordinary citizens?

Taxes will eventually have to go up. Spending may also have to be cut and big projects could be shelved. A new top rate of income tax of 45 per cent for those on 150,000-plus is pencilled in for 2011.

It's a mess and huge black shadow of tax rises looms over future

Analysis: Bill Jamieson

ONE month older and deeper in debt – and upwards of 1 trillion deeper if you add in the taxpayer investments in Royal Bank of Scotland and Lloyds to keep the two banks afloat.

Even without these massive bank-related liabilities, Britain's public finances are in an awful state. They are set to bust apart Chancellor Alistair Darling's borrowing forecasts – made only last November – for this financial year and next.

And they cast a huge black shadow over the future, with massive tax increases and government spending cuts stretching out for years.

The severe and deepening recession has sent personal and business tax revenues plunging. The latest figures show the budget surplus for January – always a buoyant month when individuals and companies settle their outstanding tax bills – slumped from 15.3 billion to just 8.4 billion.

Repayments on public sector borrowing plunged from 13.9 billion in January last year to just 3.3 billion.

Tax receipts are down 11 per cent on a year ago. Corporation tax revenues tumbled almost 25 per cent compared with a year ago and income tax and VAT receipts were also down.

The Office of National Statistics says it plans to incorporate the debts and liabilities of RBS and Lloyds Banking Group into the government balance sheet. This, it says, could add between 1 trillion and 1.5 trillion to public sector debt.

How worried should we be?

The bank liabilities could send Britain's net debt soaring to well over 100 per cent of GDP. But we won't know exactly what the damage is until the shareholdings are sold back to the private sector.

The government is counting on a recovery that will enable it to sell off these liabilities and bring debt down dramatically.

But it cannot know for sure what the end liability will be or how long it will take for the economy to recover. Until then, the taxpayer has to bear the risk. In the November Pre-Budget Report, Mr Darling forecast that the public sector net borrowing requirement (PSNBR) for 2009-10 would rise from 77.6 billion in 2008-9 to 118 billion, equivalent to 8 per cent of GDP.

Independent economists' forecasts for the PSNBR in 2009-10 now range from Ernst & Young's 130 billion to Global Insight's guesstimate of 140 billion. And for the following year, estimates are even more worrying – ranging between 165 billion and close to 200 billion.

With the busting of the government's so-called golden rules on the budget deficit and debt, we are now in uncharted waters. No-one knows what is "prudent" or what the limits are on government borrowing.

Financial markets will determine when enough is enough. This could show through in renewed weakness in the pound and in reluctance of overseas investors to buy government gilt-edged stock – the IOUs it counts on investors to buy to maintain the current level of government spending.

A "buyer's strike" could ultimately force the government into the hands of the IMF as in 1976.