The national debt is likely to be catapulted through the £2 trillion mark following the Treasury’s decision to stand behind Britain’s troubled banks’ debts.
In the latest Government figures, which underline fears about the impact of the crisis on the taxpayer and may spark further jitters over Britain’s creditworthiness, the Office for National Statistics confirmed that it now considers both Lloyds Banking Group and Royal Bank of Scotland to be public sector companies.
The ONS expects to have to add between £1 trillion and £1.5 trillion to the UK’s public sector net debt, taking the total national debt to an unprecedented £2.2 trillion – just under 150pc of gross domestic product. This would be the worst debt total since the 1950s, when Britain was in the process of paying back its war debts.
The figures were the latest in a blizzard of bad news on the public finances, which have been badly hit by the financial and economic crisis.
The ONS confirmed its decision to add the debts of Lloyds and RBS to the public balance sheet, but warned that their complexity meant it was still working out exactly how much this would impact the national debt.
Although the sums involved are likely to frighten many taxpayers, the Government and independent analysts insist that the eventual cost to the taxpayer – even in the case of a further severe financial slide – would be only a fraction of this total.
Goldman Sachs has estimated that the taxpayer may have to bear about £120bn of extra losses associated with supporting British banks.
The ONS figures also included the impact of the nationalisation of Bradford & Bingley, which pushes up the public sector net debt by a further £50bn, meaning that it is already at the highest level since 1977.
However, Simon Hayes, economist at Barclays Capital, added: “To the extent that no government is likely to stand by and watch a major bank collapse, it is somewhat arbitrary whether a bank’s liabilities are included in the public finance statistics or not.
“When push comes to shove, the public finances of all major economies are vulnerable to any further deterioration in banking sector prospects, whatever the official net debt figures might say.”
Although these figures will prove an embarrassment for the Chancellor, of more concern was the sharp drop in tax receipts in January – a month that is usually one of the best.
At £53.8bn, receipts were almost £7bn less than the same month last year. As a result, the Government paid back just £3.3bn of borrowing, compared with £13.9bn in the same month last year, the lowest January surplus since 1995. The surplus was also limited by a sharp increase in public investment.
Government borrowing for the financial year to date now stands £67.2bn, compared with £23.1bn at the same time last year. The rise in borrowing is also partly explained by the rising level of unemployment in the UK, which forces the Government to spend more on benefits.
Economists said the ONS figures made Alistair Darling’s projections for £118bn of borrowing in 2009/10 look unrealistic, with some forecasting about £150bn.
“Spending will rise sharply over the coming months as unemployment surges, while the deep contraction in activity will continue to reduce tax revenues,” said Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club.
“We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget. ITEM expects Public Sector Net Borrowing to rise above £130bn in 2009/10.”