Chronicle of a debt foretold

By P.W. | London

AN ODD thing occurred this week. Britain's national debt jumped by £1.3 trillion, virtually 100% of GDP, and hardly anyone paid attention. The bad news was crowded out by the surprise 0.5% drop in national output in the last quarter of 2010.

There was reason to this apparent insouciance. What happened was that the figures published by the Office for National Statistics (ONS) finally caught up with the huge banking bail-outs of late 2008, when the government took effective control of Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG) by injecting big slugs of capital into them.

Yet even if this was a chronicle of a debt foretold, it is worthy of note. Even in these troubled times it is not every day that the national statisticians of any country reveal a near trebling in debt. Before the banking rescues in October 2008 net public debt stood at £742 billion, equivalent to 52% of GDP. By the end of the year it had soared to £2,070 billion, worth 147% of GDP, according to the report published on January 25th.

The ONS had already included in its previous public-debt figures Northern Rock, a mortgage lender that was eventually nationalised after suffering Britain's first bank run for over a century. Together with Bradford & Bingley, another former building society that was rescued, that had added around £130 billion to the nation's liabilities. But these mortgage banks were minnows compared with RBS and LBG, which put a further £1.3 trillion on to the public balance-sheet. Following its ill-fated takeover of the Dutch bank ABN AMRO, RBS had become the world's biggest bank by size of balance-sheet while the shotgun wedding between relatively healthy Lloyds TSB and ailing HBOS during the banking crisis had created in LBG a domestic behemoth controlling around 30% of mortgage lending and current accounts.

In some ways, the surprise in the figures (other than the lack of interest in them) was that they were smaller than had once been feared. Swollen by derivatives, RBS alone had a balance-sheet of £2.4 trillion when it was rescued. Under national-accounting rules, the ONS has slimmed these down, leaving out derivative positions, knocking off debt held by foreign subsidiaries and also excluding liquid assets in line with the definition of net public debt.

Does it matter that Britain's public debt – allowing for subsequent heavy government borrowing but some shrinkage of the banks' balance-sheets – now stands at 155% of GDP? Not really since the government also controls the assets on the other side of the banks' balance-sheets. Only if they turn sour will there be a genuine further call on taxpayers, other than the equity they have already ploughed into the businesses, together with a form of catastrophe insurance for RBS if its loans incur really serious losses. And if things work out better than expected, the taxpayer might even make a profit on these unwelcome emergency investments.

The Treasury and the ONS publish another figure for net debt, which strips out most of the effects of the financial interventions on the grounds that they are temporary because the government intends returning the banks to the private sector. On this basis net public debt reached £889 billion, or 59.3% of GDP, at the end of 2010. On a gross basis (ie, not netting off liquid assets held by central government and local authorities) it has already reached £1 trillion. These are the figures to worry about.