Saith the FT:
Northern Rock was officially classed a public sector company on Thursday, bringing its debts on to the government’s books and blowing apart one of the Treasury’s cherished budgetary rules.
The Office for National Statistics announced that the government has had so much control over the stricken mortgage lender since October that it should be classified in just the same way as nationalised entities such as Royal Mail.
While the ONS said the issue of control over the company was different from “nationalisation”, many will conclude that since the ONS views the bank as so similar to other nationalised companies, the term should apply to Northern Rock.
The ONS will not yet say exactly by how much public sector net debt will rise as a result of the reclassification, but said that on the basis of Northern Rock’s published accounts for the end of 2006, £90bn will be classed as public debt.
Since the bank lent heavily in early 2007, this figure might rise a little or might fall a little, reflecting mortgage redemptions since the crisis hit Northern Rock in September, but the Financial Times understands that the £90bn figure is a reasonable guide to the final amount.
The ONS said the likely increase in public sector net debt represented 6.7 per cent of gross domestic product. If added to the current level of debt, the total public sector net debt would rise to 44.4 per cent of GDP, far above the government’s self-imposed ceiling of 40 per cent.
Treasury documentation from the pre-Budget report last October insists that to be sure of meeting the sustainable investment rule, “net debt will be maintained below 40 per cent of GDP in each and every year of the current economic cycle”.
This reclassification therefore blows a huge hole though the letter of the fiscal rule, which will add to the pressure on Alistair Darling, the chancellor, who critics accuse of running too lax budgetary policy as the UK economy heads for a slowdown.
The Treasury has previously let it be known that it will ignore any reclassification of Northern Rock as a temporary aberration and will invoke little-read passages of the legally-binding Code for Fiscal Stability to give it some leeway.
Officials also argue that Northern Rock has lots of assets, most of which are not netted off in the rather arcane public sector net debt classification. They insist they will not raise taxes or cut public expenditure decisions because of this breach.
But officials recognise that breaking one if its cherished rules is likely to cause a political storm.
Many accountants and economists suggest that the Treasury should modify its budgetary rules in light of reclassification decisions such as these and likely decisions soon to bring the private finance initiative on to the public books.
The Budget on 12 March would be the time Mr Darling could announce a review of the rules, although it would be politically difficult to change the rules just at a time when they are under pressure.
Shares in Northern Rock were 6.4 per cent higher at 104¼p.