Northern Rock expands state debt

Rescuing the bank has seen the national debt balloon

The government rescue of Northern Rock bank last year has pushed up the level of the national debt.

In August, net government debt stood at £633bn which was 43.3% of the nation's economic output, known as GDP.

A year ago, the level of state debt stood at £507bn, or just 36.4% of economic output.

The Office for National Statistics (ONS) said most of this was due to the cost of buying Northern Rock and taking on its liabilities.

Nationalisation

The near-insolvent Northern Rock was formally nationalised in February.

However, the ONS has now revised its monthly state borrowing figures back to October 2007, to include the effect of the bank's bail-out in the national debt.

That was when the Rock was first included in public finances as a result of the rescue operation mounted that summer and autumn by the Bank of England and the Treasury.

By the end of June this year, the government had loaned directly the Northern Rock £21bn.

However, the liabilities taken on through the Rock's takeover have boosted the national debt by much more - pushing it up by £92bn last October.

The Bank of England's extra financing to the banking system because of the credit crunch, known as the Special Liquidity Scheme, may also be included in public finances as well.

However the ONS said it had not yet come to a decision on how to do this.

Record borrowing

In August alone, net borrowing by the government rose by a record monthly sum of £10.4bn as it sought to finance its own spending.

The figure was higher than expected because weak growth in tax revenues, due to the economic slowdown, had not kept pace with increased public spending.

Earlier this year the chancellor Alistair Darling predicted that he would have to borrow an extra £43bn this year.

But so far, in the first five months of the financial year he has already borrowed £28.2bn, suggesting he may well exceed his target.

"If recent trends are sustained, borrowing would reach £64bn for the year as a whole - almost 50% higher than the government’s £43bn target and well above the record deficit of £51bn in 1993," said Andrew Goodwin of the Ernst & Young ITEM Club.

"And with the economic outlook likely to worsen over the coming months there is a good chance that the outturn could be even worse," he added.