State borrowing and the Credit Crunch

Some say the Uk public finances were in good shape if we ignore the costly bank interventions and special measures needed for the Credit Crunch. The figures as published by the Office of National Statistics do not support that view.

Public sector net debt rose from £323 billion in 2001 to £534 billion in 2007 before the crisis hit. During the surge in borrowing during  2008-2010, taking stated public debt to £850 billion and above,  the financial interventions only added £20 billion to the large borrowing  totals, to pay for the shares bought in RBS. Lloyds and Northern Rock, and to finance the Special liquidity scheme. This financial year so far the government has borrowed an extra £104 billion, without adding to its financial interventions.

The balance sheet impact of the take overs was much larger, but this will only be reported officially in the January government debt figures. The ONS has published provisional figures, suggesting you should add £1.5 trillion to stated public sector debt to allow for the balance sheet liabilities of Lloyds and RBS. Northern Rock and Bradford and Bingley add £150 billion to the  national balance sheet. These extra liabilities are of course offset by assets.

There are also £330 billion of contingent liabilities, based on guarantees over assets which may prove to be worth less than estimated.

The large increase in government borrowing came about through spending more than it raised in taxes over a long period. The financial interventions will have swollen both sides of the state’s balance sheet, as the January figures will show. At least we will now have realistic official figures for the state of the UK balance sheet, after months of no official figures for the banks taxpayers own.

The sooner the government starts shedding banking assets and liabilities, returning them to the private sector, the better.

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38 Comments

  1. Tim Carpenter, LPUK
    Posted January 22, 2011 at 7:21 am | Permalink

    What is more, in the run-up to 2001, debt was being eroded in the tens of billions each year. By 2007, it might have stood at £150bln. Not a surplus for “true” Keynesean stimulus to draw on, but a heck of a better position than we have now.

    The problem was the Government took all the hay other people were making while the sun shone to make the sties of it’s constituency more comfortable. Now the supply of straw has run out, the squealing has begun.

    The barn is empty.

  2. Matt
    Posted January 22, 2011 at 7:25 am | Permalink

    Is there another hidden debt item in the numerous PFI schemes up and running across the UK? I know the previous government argued these were not legitimate government liabilities but I would be interested to know your opinion. I wonder if it is a financial device used in other countries.

    • John C
      Posted January 22, 2011 at 12:18 pm | Permalink

      “he previous government argued these were not legitimate government liabilities”

      I’m not an accountant, but, we have signed up to a lot of long term PFI schemes which commit future governments to annual spending commitments.

      Even if these are not strictly government liabilities, surely it means that future governments will have less money to spend each year (by the amount committed to the PFI contracts).

      And this doesn’t even account for the terms of the lousy contracts which are already allowing the private companies to charge extortionate rates for services under the contracts. (£900+ for an XMAS tree in the treasury?)

    • lifelogic
      Posted January 22, 2011 at 9:20 pm | Permalink

      PFIs are usually a disaster not because they have to be but because the civil servants who agree the PFI contracts are not usually good at contracts, negotiation & foreseeing potential future contract changes and anyway it is not their money they are wasting. The contract are inflexible and often the provider can over charge for all the changes that will always arise.

      And that is even where there are no questionable practises going on.

      Clearly they are government long term (in effect rental) liabilities just as public sector pensions are.

  3. Mick Anderson
    Posted January 22, 2011 at 7:29 am | Permalink

    The first rule of economics should be that it’s bigger than a politicians ego. The second being that it’s not all about money.

    Mr Brown caused much of the problems in the UK economy by borrowing when he should have been saving. His ego told him that he was the driver of the “good times” when he was merely a passenger. Then, when the world economy twitched, the UK was massively over-exposed. It’s much easier to ride out any problem when you are cash rich, and he had mortgaged us way beyond the hilt.

    It might be true to say that the UK tax income is healthy, although if so it’s in spite of where we are on the Laffer Curve. However, this is more than offset by the massive overspend put in place by Mr Brown.

    For all Mr Osborne and Mr Cameron claiming to be cutting boldly, they are not. Their overwhelming targets should be to eliminate the deficit (the rate at which our borrowing is still increasing) by reducing spending before the end of this Parliament, and to reduce the number of areas that Government (of all layers) is allowed to fiddle with.

  4. lifelogic
    Posted January 22, 2011 at 7:34 am | Permalink

    “The sooner the government starts shedding banking assets and liabilities, returning them to the private sector, the better.”

    I agree with this but we need at the same time to stop the banks starving business of funds as they still are (or even withdrawing funds as they also are). These fund are often urgently need by business to finish off sound projects/investments that they are planning or have put on hold. This is needed to create real jobs to replace the state sector ones that I hope will go when Cameron finally acts.

    It is quite common at the moment for the main UK banks perhaps lending already £500,000 on a property worth £1,000,000 to refuse any further lending even so much as a £10,000 overdraft at the moment for no good reason relating to risk. Just because it does not suit the bank for cash/internal regulatory reasons or they want to encourage full repayment of the £500,000. Second charge lending is also very hard to obtain.

    The banks are acting as a dis-functional blockage between depositors and sound borrowers and are able to charge huge margins where they do lend.

    Get some proper competition in banking so they have to stop robbing sound borrowers on fees and margins and so the private sector can take up the slack in the economy – and quickly if you want to have a chance of being re-elected.

  5. Alte Fritz
    Posted January 22, 2011 at 8:09 am | Permalink

    The suggestion that public finances are alright but for the banks is obviously part of an agenda. Yet did not Keynes say that a governement should run a deficit in times of hardship, to provide a stimulus, but avoid deficit in times of plenty?

    • Duyfken
      Posted January 22, 2011 at 1:29 pm | Permalink

      But by the same token, in good times it is prudent to conserve any surplus. It is surely poor practice to “run a deficit” when one already has a large, very large, debt with which to contend and to service with interest payments.

  6. Howard
    Posted January 22, 2011 at 8:51 am | Permalink

    Don’t expect a mea culpa from the new Shadow Chancellor. The massive debts will be referred to as necessary ‘investments’.
    I’m sure you’d hear similar excuses in the bankrupcy court.

    howard

  7. Bill
    Posted January 22, 2011 at 9:04 am | Permalink

    Wouldn’t have been so bad if Mr Brown’s spending spree hadn’t squeezed the productive part of the economy in order to fund growth in the unproductive public sector.

    Now when we’re trying to achieve growth, but with tough employment laws (more paternity leave – are they doing this in China?) and high taxes – add to this the lack of bank borrowing facilities to small and medium sized business.

    Not enough is being done to reverse the damage done by Labour – I think.

    • Andrew Johnson
      Posted January 22, 2011 at 11:17 am | Permalink

      “Not enough is being done to reverse the damage done by Labour – I think.”
      Couldn’t agree more. Despite all the words and good intentions from the Coalition, very little of fiscal substance has happened or is proposed.
      Extremely disappointing, because we simply can’t keep pursuing a p0licy of spending more than we receive. I paraphrase what John has said, “Cuts? What Cuts? Government spending is going up year on year.”

  8. Éoin Clarke
    Posted January 22, 2011 at 9:35 am | Permalink

    US National Debt doubled under Reagan. The Conservatives also left a debt of £350bn in 1997. As a % of GDP, debt initially decreased under Labour.

    • alan jutson
      Posted January 22, 2011 at 2:17 pm | Permalink

      Eoin
      Conservatives left £350 bn in 1997.

      Oh if it was only that now !!!!!!

      Was it not the case that debt was being repaid because Brown followed the Conservative budget for the first 2-3 years when he was in office, whilst he learnt how to add up !!!

      Clearly maths not his strong point, as we have all now seen.

    • norman
      Posted January 22, 2011 at 2:48 pm | Permalink

      Do you know why debt decreased initially under Labour?

      Although your point is taken, nowadays all politicians operate in a tax and spend environment – the only real difference is in quantity. What is needed is a new way of looking at things, not bringing in the private sector to do what the public sector currently is but being paid by the public sector, but actually drastically reducing the number of things the public sector does (or tries to do, shambolically more often than not).

    • mchael mcgrath
      Posted January 22, 2011 at 3:50 pm | Permalink

      “debt initally decreased under Labour”…of course it did. For the first three years from the 1997 victory G Brown confirmed that he followed the plan he inherited from the previous Conservative administration

      Then, buoyed by this success and convinceed that it was due to him, he started his own agenda…and so here we are

    • John Wood
      Posted January 22, 2011 at 9:21 pm | Permalink

      As it was under the previous Conservative Government and it only decreased under Labour because they said they would stick to Consevrative Spending Plans.

      And after a few years they didn’t – the rest is history.

      (A second aside) the GDP definition incorporates private spending – the debt/ property bubble of the 2000s massively increased GDP however as we know it was unsustainable and this part of GDP must now collapse as debt is repaid. If we ignore this aspect of GDP then Spending by the Labour party as a percentage of GDP is substantially higher than the official figures let out.

  9. FredDibnahsLoveChild
    Posted January 22, 2011 at 9:53 am | Permalink

    “Public sector net debt rose from £323 billion in 2001 to £534 billion in 2007 before the crisis hit.”

    Yes, but net liabilities had dropped from around 60% of GDP in 1999 to around 57% of GDP in 2007.

    Many people want to believe that the current difficulties were entirely due to mismanagement by Labour. The facts show, however, that the global debt crisis did much more damage than Labour could have possibly done on their own!

    It is true however, that under Labour the contribution of Industry to GDP fell from around 27% in 1995 to aound 18% in 2008. A trend that hopefully this Government will reverse ( but there’s no much hope so far!).

  10. Lucy
    Posted January 22, 2011 at 10:18 am | Permalink

    “Some say the Uk public finances were in good shape if we ignore the costly bank interventions and special measures needed for the Credit Crunch.”??????

    Some say my finances are all right if you ignore the fact that I’ve got no money.
    If I ran them like politicians I’d also have a mortgage for £500,000 on a house worth £50,000, 15 credit cards all maxed out, (etc -ed) Not forgeting the massively expensive and undemocratic country club I belong to.

    • Lucy
      Posted January 22, 2011 at 12:49 pm | Permalink

      If you’re going to edit the bits you don’t like Mr Redwood please just don’t bother to post my comments at all. War and immigration are not unmentionable subjects amongst ordinary people, only those that apologise for or profit from them.

  11. A.Sedgwick
    Posted January 22, 2011 at 12:14 pm | Permalink

    Thank you for those figures. The propaganda that is being aired by Labour on the national debt is a serious worry for democracy and the younger generations. There is an orchestrated attempt at brainwashing the gullible portion of the electorate at the moment with youngish MPs popping up all over the networks spinning away like tops to further their careers. Now that Balls is in charge of economic matters for Labour we probably ain’t seen anything yet. In a recent blog I predicted Ed for PM but by chance didn’t say which one , I think I have doubled my odds here.

    Yes the state needs to get out of the banks and make it plain that the government is not going to be the nice guy next time charging to the rescue.

  12. Éoin Clarke
    Posted January 22, 2011 at 1:28 pm | Permalink

    Dear John,

    ComRes conducted a poll on EURO related issues I am sure you would enjoy reading it. I attach the link.

    http://ht.ly/3HkLb

  13. sm
    Posted January 22, 2011 at 2:05 pm | Permalink

    So about 3 trillion on hopefully ballpark data. But is it ballpark? What about the whole house of cards not on the national balance sheet because of the bailouts or implied bailout and liquidity support from all the world governments. (US is 14 trillion dollars apparently)

    Why do assets seem to disappear at the mention of pay up or pay me back now, but manage to sustain bonus payments? Bonuses should be tied to the assets created in the deal and deferred over the period of the loan financing it.

    Bankers switching employer , should be required to seek approval from the banks concerned and the FSA so that inside knowledge does not distort competition. Perhaps with a mandatory gap year- on minimum wage of course.

    Any bank which does not co-operate is locked out of UK banking. The US does threatens this all the time.

    The time for mourning is over, the time to fix things is now. This applies to not just banking.

    Either get involved properly or seperate the banks, protect little Jo to an extent, and get out of the way.

    Call their bluff, increase competition and always remove limited liability where ever and whenever public support is required whether asked for or imposed.

    Introduce worldwide taxation on bankers ( UK employee’s first), again lock out banks from EU markets that do not comply. Offshore is a legal fiction so remove it as such. That’s what navies are for. Tax non domiciles same as normal residents.

    I would be interested to know where all the non domiciles that left went? I hardly think China.

    Cameron & Co should get across to the US and start seriously talking to the Whitehouse before it all blows up again!

  14. alan jutson
    Posted January 22, 2011 at 2:29 pm | Permalink

    John

    Perhaps now that Mr Cameron is looking for a new media man, we may get a change of direction, and some commonsense press releases about the fact that spending is still increasing, that cuts are simply very small, so the media have got it wrong for the past 6 months.

    Yes we need cuts, of course we do, but nothing substantial has happened yet !

    Perhaps also we could do some publicity about the fact that our debt is still rising at around £7,000 per second with a backdrop of the increasing numbers clicking up on a digital display behind any Minister making a statement.

    A simple aside after any communication, “whilst I have been speaking to you our debt has grown by £ x…… milion thanks to the past Governments policies, that is why we need to take action”.

    If DC wants to give me a call, happy to advise further.

  15. Lindsay McDougall
    Posted January 22, 2011 at 2:35 pm | Permalink

    Please, Mr Redwood, may we have a statement about Northern Rock, RBS and Lloyds that looks at matters from the taxpayers point of view, for example:

    (1) What was the total amount that we paid for shares in these companies?
    (2) What is their total value now?
    (3) Have they fully written off or written down their toxic assets?
    (4) If not, what is – in the worst case – the total amount of further write downs?
    (5) What is the total amount of guarantees that the taxpayer might have to fund?
    (6) Are these companies making profits yet?
    (7) [One for the chancellor] What is the objection to selling shares or assets now?

  16. BobE
    Posted January 22, 2011 at 5:53 pm | Permalink

    John, simple question.
    Why can’t they just reduce what is borrowed and start to repay the balance?

  17. Mike Stallard
    Posted January 22, 2011 at 6:00 pm | Permalink

    The lesson which I have learned from the banking crisis is that when things look dodgy, no matter what the geniuses at the sharp end say, they probably are. So it is refreshing to see that, once again, you are totally in command of the truth.

    By the way, did you read the nice things that Simon Heffer said about you in the Telegraph today?

  18. Denis Cooper
    Posted January 22, 2011 at 6:26 pm | Permalink

    There’s a perpetual problem with mismatched timescales.

    The economic cycle is typically about 10 years.

    The parliamentary electoral cycle is typically 4 years.

    So-called “long term incentive plans” for senior managers typically run for 3 years.

    So we have the dominant driving cycles in both public life and private business running on shorter periods than the economic cycle, and of course out of kilter with them, meaning that both MPs and the government, and senior managers of private business, can easily get seduced into thinking which is essentially short term from an economic standpoint.

    It’s quite hard to identify anyone with significant power and influence who is taking a long term view, except possibly the higher echelons of the civil service – and their long term view is not necessarily one that the rest of us want.

    The government could try to get “long term incentive plans” to mean longer than the typical economic cycle, but that seems unlikely to happen; and I suppose that we could extend the maximum term of Parliament to say 15 years so that politicians weren’t always so preoccupied with winning the next election, but that cure could be much worse than the disease.

    I suppose we could try to get the political parties to supply MPs who thought more about the long term interests of the country and who were willing to stand up for them – for example by refusing to vote through extravagant deficit budgets when economic times are temporarily good, and by refusing to allow the government to accumulate massive hidden liabilities – but that also seems unlikely to ever happen.

    I have to admit that I can’t readily see any workable solution to this problem.

  19. Javelin
    Posted January 22, 2011 at 8:08 pm | Permalink

    Banks were a small part of the problem of loose risk management. The larger problem has been at the state level. Governments simply borrow too much and spend too much to pay for votes. All parties do it.

    The big question is how we can turn around excessive spending.

  20. Steves
    Posted January 22, 2011 at 10:09 pm | Permalink

    John,

    I earnestly urge you to view this chart and article at market-ticker.org .It will knock your socks off. A Layman’s explanation is also found in the comments (you have to scroll down a fair way) in the second comment posting by ‘Genesis’.
    http://www.market-ticker.org/akcs-www?post=177912

  21. Bazman
    Posted January 22, 2011 at 10:27 pm | Permalink

    I don’t hear many Tories complaining about Labours spending spree and you know why they are so quiet about the City now? Because they need the money. LOL! Where are all the the Tory fuel protesters?

  22. adam
    Posted January 22, 2011 at 10:51 pm | Permalink

    Peter Sissons

    For 20 years I was a front man at the BBC, anchoring news and current affairs programmes, so I reckon nobody is better placed than me to answer the question that nags at many of its viewers — is the BBC biased?
    At the core of the BBC, in its very DNA, is a way of thinking that is firmly of the Left.

    http://www.dailymail.co.uk/news/article-1349506/Left-wing-bias-Its-written-BBCs-DNA-says-Peter-Sissons.html

    • adam
      Posted January 24, 2011 at 2:03 am | Permalink

      I agree that impartiality at the BBC is paramount
      – Culture Secretary, Jeremy Hunt

  23. Acorn
    Posted January 23, 2011 at 12:00 pm | Permalink

    Regarding debt and deficit watching. According to state-side bloggers we have to watch out for the public sector debt going up faster than the deficit implies it should. The US has this problem; experts have traced it to direct loan accounts and various bits of off balance sheet accounting. That is; what may be a liability in some government sponsored / guaranteed entity, appearing as a solid gold asset in the Treasury accounts.

    This is above my pay grade JR, I will leave it to you to work this one out.

    • alan jutson
      Posted January 23, 2011 at 5:36 pm | Permalink

      Acorn

      Above my pay grade as well but it:

      Sounds a bit like creative accounting, and we all know the reason why it is given that label, its not real accounting with real figures in the right margins, or under the correct headings.

      Anyone who uses such methods is trying very hard to hide the truth, some Companies on the verge of Bankruptcy also use such a ploy with a limited amount of success, until the real money runs out and the truth is exposed for all to see.

  24. Mark
    Posted January 23, 2011 at 3:37 pm | Permalink

    There is a lot of contentious accounting that surrounds the various estimates of the true levels of government debt. For those with the patience to try to follow he gobbledegook :

    http://www.statistics.gov.uk/cci/article.asp?id=2301

    which includes a “justification” for why much of the balance sheets of the State banks will actually be excluded from the national accounts.

    An attempt to be more honest is here:

    http://www.statistics.gov.uk/CCI/article.asp?ID=2463&Pos=&ColRank=1&Rank=224

    And of course we had Martin Durkin’s film that discussed the £4.8 trillion debt estimate on C4.

    So far as the State banks are concerned, what has changed? They are still heavily dependent on funding from the BoE and on the subsidy that they get from rigged interest rate markets. Although there has been a correction in commercial property prices, we have yet to see the real correction in residential property prices that would reduce the risk of lending in this sector, and despite the subsidies there has been no substantive change to their mortgage books. Only when this has been tackled can they be returned to non state ownership on a permanent basis. Trying to do this on the back of the Brown/Darling re-inflated house bubble while they are still heavily dependent on BoE funding would be purely illusory.

    Indeed the government should aim to shed banking assets – but to do that it must let those assets find fair value in an undistorted market. We are several years away from that at present.

    • Simon
      Posted January 24, 2011 at 2:46 pm | Permalink

      Good response Mark .

      By the time a bubble has formed it is already too late to prevent people getting hurt and when the bubble deflates and finding themselves in over their head .

      Still the banks successfully resist being broken up and being made fail-safe .
      Still the little man in the street has to guarantee deposits in banks after counter-parties losses arising from synthetic instruments have been paid .

      The elite have pushed too far and if the Govt thinks it can get away with flogging off the family silver on the cheap to their mates then they are wrong and will get soundly trounced at the next election .

  25. Julian
    Posted January 23, 2011 at 4:14 pm | Permalink

    I’ve got good news – there is no longer a debt problem!
    This has to be true because Brighton and Hove Council are spending money on the junction of Church Rd and Grand Avenue. This is not essential maintenance but supposed improvements to a junction that has been like it is for many decades and did not really need any modification – at least not when public finances are under enormous pressure. So I no longer feel any need to agree with any public spending cut if we can afford this kind of spending!

  26. Andrew Gately
    Posted January 23, 2011 at 6:55 pm | Permalink

    Couple of points:

    1 Why does the office for national statistics not produce information using generally accepted accounting practice?

    2 The govt. did not buy shares for Northern Rock they stole them.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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