Government in debt – now at £1.8 trillion

Readers of this site will know that I last estimated government borrowings and pension debts at £1.5 trillion at the time of Northern Rock. Today a new publication estimates it at £1.8 trillion, reflecting the increase in debts to pay for the banking rescues, the further build up in pension liabilities, and the general overrun on public spending and borrowing this year so far. Brooks Newmark has compiled his figures from official sources where possible, and brought together official government borrowing, public-private partnership borrowing, Private finance initiaitive borrowing, borrowing to fund bank capital and loan books and pension deficits.

The BBC wanted to score a couple of points against him this morning. The first was to remind him that the Conservatives did not include pension liability in the figures they used to publish for government debt when in government. That is correct. Mr Newmark responded that this government made companies put pension deficits on their balance sheets, and is lecturing us all on the need for transparency, so they should show the way in their own figures. The second was any incoming Conservative government would not want to change the figures in this way. I trust any incoming Conservative government would immediately order a proper audit of the figures, and publish the true position of the government accounts. Having an honest statement of the starting position is going to be essential to clearing up the mess.

Borrowings and other debts at 120% of National Income represents too large a risk for taxpayers. It is even worse than those figures imply, if the government goes ahead and makes RBS a subsidiary of the state. RBS has a £1.9 trillion balance sheet, larger than our National Income, so the taxpayer would be on risk for a lot if the bank were to start losing money under nationalised management. Northern Rock has been loss making since nationalisation.

A programme to cut the indebtedness of the state would begin by finding other ways to recapitalise the banks than buying shares with public money. It would move on to offering a different deal on public sector pensions for new entrants, which at least entails employee contributions which are then invested in a fund – like the MP and Local government schemes – instead of the pay as you go approach of the civil service. It might also entail only offering new entrants defined contribution schemes rather than final salary schemes to cut the risks. It would certainly include proper controls over administrative and advisory staff numbers, to fight the battle of the bureaucratic bulge.

The government has spent too much and borrowed too much before the recession begins. Now the red ink starts to flow seriously owing to the recession it is going to cause big problems ahead for state finances.


  1. Lola
    October 21, 2008

    As you suggest the reform of state employees pensions should be on the lines of freezing the benefits in the old scheme from a certain date and moving everyone, all of them, into a funded money purchase scheme from the same date. My preference, in order to generate a sense of responsibility and ownership is that all of them should be put into personal pensions with the State making a contribution. This would be excellent all round as it would put the whole thing into the private sector which would boost private employment, the funds would be invested into risky and non risky things so giving more capital to business and would set a good example to all of us.

    The implementation date must not be earlier than January 2013 as that is after the date that Mrs Lola retires from teaching!

  2. Mark
    October 21, 2008

    Mr. Redwood is spot on… again. In my opinion this country needs to follow the example of Canada which since 1991 has not passed a single budget deficit. The reason for this was a concerted agreement that the State has mushroomed out of control and risked the viability of the State for future generations. Canada since 1991 has virtually outlawed Federal Budget deficits and after 20 years claims to have proportionally the most healthiest set of public finances. Britain’s politicians must follow Canada's example. We are spending our children's and grandchildren's money and the bleeding must stop! Mr. Redwood's blog should be compulsory reading for all MPs.

  3. Mark Wadsworth
    October 21, 2008

    Excellent points, totally agreed, but I'd just like to comment on this:

    A programme to cut the indebtedness of the state would begin by finding other ways to recapitalise the banks than buying shares with public money.

    There is one blindingly obvious way – it's the good old fashioned debt-for-equity-swap.

    The much vaunted £37 billion is about 5% of the total nominal value of bonds (aka mortgage backed securities, aka SIVs, aka PIBS and so on) issued by banks. So if, on average, holders of such debt were told that 5p in the £1 is being cancelled and they are given new shares worth 5p instead, they don't suffer a real loss and hey presto! banks are recapitalised. (original shareholders might gain or lose from the deal, the maths is a bit tricky there).

    Banks could continue as privately-owned going concerns, depositors can heave a sigh of relief, no employee need lose his or her job and mortgage borrowers won't need to remortgage elsewhere.

    What's not to like?

    Reply: i agree it is an option to look at seriously

  4. rugfish
    October 21, 2008

    "Record tax receipts have filled Treasury coffers to record levels, official figures have revealed. Tax takings of £10.5bn helped public sector accounts hit a surplus of £37bn in the year to the end of March, the Office for National Statistics said.
    The surplus, which comes as the UK is gearing up for a general election, was boosted by £9.8bn in income tax receipts, and lower than expected state outgoings".

    Regrettably the above BBC article is dated 2001.

    My how time passes when you're having fun !

  5. Roy
    October 21, 2008

    "Having an honest statement of the starting position is going to be essential to clearing up the mess"

    I couldn't agree more. Going further I think there is some honesty needed now. The electorate is being told by the Conservatives that since Labour put nothing aside from the boom times we are now less prepared to enter a recession than most comparable countries i.e. the cupboard is bare. Labour are telling us than they reduced debt so much over the last ten years that we are better placed than all except Canada to borrow our way out.

    Terms like "Public Sector Borrowing", "Budget Deficit" and "National Debt" are being used in the arguments and are confusing people.

    Mr Redwood, any clarification on this would be greatly appreciated!

  6. crown
    October 21, 2008

    I do get confused with the debt figures.

    Gordon uses the IMF figures to show us in a good light. I'm not sure what figures David Cameron is using to show us above egypt etc.

    It would be a useful blog post to descibe how each set of figures quoted is concoted.

    1. Acorn
      October 21, 2008

      crown; the CIA World Fact Book is a useful source for comparison between countries. It may not tell the whole story but they are compiled to the same set of rules. Thus Egypt has a 105% public debt ratio compared to the UK at 43.6%. The following link with put you at the Field listing – Public dept. You can click on items to get the definition and put the item in country rank order. Have fun.

  7. APL
    October 21, 2008

    JR: "Government in debt – now at £1.8 trillion"

    The frightening thing is, they plan to spend their way out of recession.

    Well, I guess we are going to see the difference between a Tory boom and bust, and a Labour boom and bust.

    After a Labour boom and bust, there is only a smoking black hole where the UK economy used to be!

    It's a good job Mr Redwood has banned expletives on his forum, I have a few choice ones for Mr Brown!

  8. Acorn
    October 21, 2008

    I wish you luck trying to work out the true level of the nations debts. I doubt if we have enough forensic accountants to tackle the job. Why is it that I can find out more about the state of US government finances on the INTERNET than I can about the UK?

    Where are the UK expert blogger sites like the US has. "Burning our Money" and The TPA are doing a much better job than the big brain think tanks like the IFS and the IEA. Is there a conspiracy of silence; do they all belong to the same secret handshake clubs?

    How about this for an off-the-wall idea. We put all the public sector pension funds – funded or unfunded – into one big pot. We stick all our credit crunch assets in the pot. Everything from preference shares in banks; equity shares; junk mortgage backed bonds; all public sector pension funds assets liabilities; and, public sector employers and employees contributions – where they actually make any real cash contributions that is.

    We contract running the big pot to our biggest and best pension fund companies in a manor that will not overly distort the private sector markets.

    When the dust settles, a lot of this junk is going to be worth something, so we sell it back into the market, put the cash in the big pot to help pay current public sector pensioners.

    Every public sector employing entity gets the real bill for the cost of its pension provision – including the early leavers. That includes all the taxpayer contributions that go to top it up. We may all be aware of the work of Neil Record, that showed that a female police officer should be paying a total of some fifty percent of salary rather than the twenty percent she and her employer are now paying.(words left out)

    Also, public sector employees and their trade unions need a dose of reality when they get to their next winter of discontent. We put a line on the pay check that shows the taxpayers contribution to the employees contribution. Should make for interesting pay negotiations and possibly the death of Defined Benefit public sector pension schemes.

    John, please don't tell us the MPs pension scheme is fully funded because it ain't.

  9. Nick
    October 21, 2008

    Readers of this site will know that I last estimated government borrowings and pension debts at £1.5 trillion at the time of Northern Rock. Today a new publication estimates it at £1.8 trillion, reflecting the increase in debts to pay for the banking rescues, the further build up in pension liabilities, and the general overrun on public spending and borrowing this year so far.

    Surely an underestimate, or are you saying that we aren't entitled to the state pension, or the state second pension?

    If the state workers are costing 1 trillion, with a relatively small number of people compared to the rest of society, what's the cost of the state pension with 50 million in the queue? What's the cost of the remaining pensions for the 10 million retired (substiute more accurate population numbers)

    The figure is going to be way above the 1 trillion mark.

    He's another rough estimate.

    40 million people yet to retire. Either they get a full state pension, or they are highly likely to be poor and get a top up. Cost per year of 5,000

    Since it's inflation linked, we don't need to worry about present valuing anything. It's 5K a year, per person.


    So roughly, each person costs 100K to fund. (A bit of an underestimate since the corresponding annuity is 140K but makes the maths easy).

    100,000 * 40,000,000 * 20 = 8 Trillion

    About 8 trillion in debt on an on going basis.


  10. Pete Chown
    October 21, 2008

    There are two problems with the increasing public debt. The first is the obvious one, that it is unfair for us to pass this burden to future generations.

    The second is that the markets could lose confidence in the government's willingness to repay the debt. Traders may become concerned that the government will allow inflation to take hold, as a way of evading its obligations. (It's unlikely that a Western government would formally default, but inflation has the same effect as far as lenders are concerned.)

    If the markets did lose confidence, it might happen very suddenly. The pound could start falling rapidly, and the government could find that it has to pay much higher interest rates on its bonds.

    Brown and Darling are taking a big risk with the economy. If the markets lose confidence, they could have a sudden sterling crisis and a collapse in the bond market. An "acute" financial crisis is just what we don't need, when we're trying to fix the "chronic" issues in the economy.

  11. David Burch
    October 21, 2008

    Thank you John for putting figures on the government indebtness and the civil service pension deficit. I had rather though it had slipped off the political agenda until the date that the government would have to default on payment.

    These are fighteningly large figures and does show that Brown has most definitely divorced prudence (if in fact they were every married).

    Do not forget that there are other ways to tackle the pension black hole ie raising the retirement age as well as converting to a defined benefit scheme. Under the banner of harmonisation of pension provision will have us all having to plan and dig deeper to properly fund a decent retirement or opt out and work longer.

    As to the bank such as Northern Rock and RBS a private sector option such as administrative receivership and sale of assets is one here rather than burden future generations with massive debt repayment.

  12. Johnny Norfolk
    October 21, 2008

    You see Labour are not prepared to govern.

    They just want to continue to spend and they know they will loose the next election.
    The Tories come in and start to govern the country and that means more Thatcher type pain to get us out of this mess. Labour then of couse will try to pass the buck and blame the Tories as thay have always done.

    It is just a repeat of last time only worse.

    The worst thing that has happened to Britain since the war is GORDON BROWN both as chancellor and PM.

    Labour can only spend not govern.

  13. mikestallard
    October 21, 2008

    On Newsnight last night, it was very plain that the government actually believes its own (fiddled and incomplete) figures for the national debt.
    I noticed, with Yvette Cooper, too, that she was belittling the debt a couple of nights ago.
    It was so rewarding to have an adult discussion on Newsnight between the two of you.
    And it is very refreshing to see, from the thread above, that at long last we are waking up to the dangers of spending our way out of a massive debt.
    You just cannot do it.

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