Labour's borrowing binge

By ALEX BRUMMER, CITY EDITOR
Updated:

 

Alistair Darling's ears must have been burning during the Tory economic summit held at the Cass Business School in the City.

Several respected commentators came to the microphone to warn the public finances are going to pot.

Robert Chote, of the Institute of Fiscal Studies, argued that the slowdown in the economy would add £10bn to the 2008-09 budget deficit increasing it to £50bn.

Michael Saunders of Citigroup went a step further, saying the gap between spending and taxes could swell to 5% of GDP, or £65bn.

This is just the start. The calls on the exchequer in the coming months will be huge.

The £2.7bn package of measures earlier this summer, designed to compensate for the abolition of the 10p tax band, is regarded as inadequate and more will be required.

There is pressure on the Chancellor to roll back higher vehicle excise duties on already-owned cars.

He has waived an increase in fuel duty and the airlines are campaigning vigorously against the new, 'greener' plane tax.

In addition, there is the possibility that Darling may have to consider some kind of compensation to Equitable Life policyholders with campaigners talking of a £4.5bn liability.

None of this is good for any political party. It looks as if the Conservatives, if they were to come to power, would inherit a black hole in the public finances similar to that which had to be dealt with by successive chancellors in the 1990s.

Cameron's contribution to the debate was to suggest it was time to remake the fiscal rules, so that they are forward looking. This would end the farce of redefining the economic cycle at every budget to make it fit the government's borrowing profile. But the cold reality is that the first act of a new chancellor may be to hold a mini-budget and raise taxes to staunch the flow of red ink.

Rights stuff

We should brace ourselves for headlines declaring the fundraising issues for HBOS and Barclays a flop. Bradford & Bingley already is beyond the pale. In the case of HBOS it is highly unusual for so many shares, up to £1bn, to be left with underwriters. This suggests the army of defectors reaches far beyond the bank's confused private investors and includes bigger funds and holders.

Yet over the longer haul it is hard to believe that those who decided to bypass the offer, which looks the sensible thing to do, may not come to regret it. These investors may believe that the current woes of HBOS and Barclays are so bad that they will not recover. If so they will suffer a dilution of their holdings, unless they have decided to buy the shares in the market.

Clearly, there are problems at both banks. At HBOS fears about arrears on its mortgage book continue to dog the stock, along with worries about Bank of Scotland's private equity lending. At Barclays it is still unclear how its 'wait and see' accounting policy for 'toxic debt' will pan out over time although senior bankers there remain surprisingly upbeat.

Except in the case of B&B where poor news about profits, financial controls and management, undermined the original fund-raising operation - which had to be redrafted several times - all the banks concerned, RBS, HBOS and Barclays, have or will receive their capital injections. If there has been a problem it is with the protracted rights process which requires expediting. The dithering at HBOS and Barclays, which twiddled their thumbs until RBS went first, didn't help.

As matters stand the shortfall of 6¾p on the 275p HBOS rights price is much less that it might have been, partly as a result of the improved news from JP Morgan and Wells Fargo across the Atlantic. The outlook for banking may look gloomy at present. But within a couple of years there will be investors kicking themselves for the failure to bottom fish.

Airport dirge

Anyone hoping for radical change from Sir Joseph Pilling's report on the future of the Civil Aviation Authority - described by IATA as the 'year's worst regulator' - will be chagrined.

Perhaps when you put one former civil servant in charge of an inquiry into others in the public service, boring will always be the result. Pilling suggested the CAA gives greater weight to passengers and consumers. This is like calling for motherhood and apple pie.

And the suggestion that the board should be shaken up to conform to modern governance standards with a non-executive chairman and chief executive is hardly original thinking. Ruth Kelly should find someone who knows about the aviation industry to rewrite Pilling's disappointing twaddle.

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