Magazine article Public Finance

Brown's £500Bn Bailout Sends Debt Soaring to Record Level

Magazine article Public Finance

Brown's £500Bn Bailout Sends Debt Soaring to Record Level

Article excerpt

Economists have warned that the government s £500bn banking sector rescue package will lead to a further squeeze on public spending in two to three years' time - and put public sector debt at its highest level since the 1970s.

The measures announced by Chancellor Alistair Darling including part-nationalisation of major high-street banks and protection for UK customers caught out by the collapse of Iceland's financial sector were followed by calls from town hall leaders for similar support for local authorities with money in Icelandic banks.

A number of local authorities are understood to have deposited sums with the stricken Icelandic bank Landsbanki, which was expected to default.

Darling's announcement, made before the financial markets opened on October 8, was reiterated in the Commons later that day, with both Conservatives and Liberal Democrats offering support for his measures.

But a planned evening lecture - in which the chancellor was expected to outline changes to the government s fiscal policy and borrowing constraints - was postponed.

The government had been under pressure to ditch or change its fiscal framework, amid speculation that its sustainable investment rule would be broken with debt hovering just below the ceiling of 40% of gross domestic product.

But Prime Minister Gordon Brown signalled that the programme to support the banking system marked a change of tack, declaring: 'This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem.'

Brown admitted that the rescue package would be funded by borrowing, but pledged: All these are investments being made by the government, which will earn a proper return for the taxpayer.'

The public purse would get the upside' from the £50bn recapitalisation scheme - a key part of the rescue package that means the government acquires preferential shares in the banks.

Economists calculated that Darling's move would allow debt figures to rocket through the ceiling set in the fiscal rules. Robert Chote, director of the Institute for Fiscal Studies, told Public Finance he was expecting the £50bn bank capitalisation to be added to public sector net debt. 'That would add 3% of national income to the net debt.'

He noted: 'That increase is on top of Northern Rock, Bradford & Bingley... and the probably modest costs of compensation [for customers of Iceland's banks].' If these elements were added to the debt figures, the PSND would reach 50% of national income 'which we haven't seen since the mid-1970s', Chote said. …

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