UK financial crisis: economist warns of 'very heavy' tax rises » Bill payments » 24dash.com

Sharp tax rises and spending cuts could loom as the UK bank bail-out poses an even bigger threat to public finances than previously thought, it was warned today.

The Government's initial rescue package last week said an initial £25 billion would be offered to ailing banks, although today's massive £37 billion - split between Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB - has already dwarfed this.

Jonathan Loynes, chief European economist with Capital Economics, said the extra burden came with the UK's finances already under strain from an imminent recession.

"At some point in the future, very heavy tax increases or spending cuts will be required to get the public finances back into a sustainable position," he said.

Mr Loynes said the sums were bigger than first thought and the Government was taking up many more risky "ordinary" shares than the preference shares announced last week.

The sheer scale of the cash injections - which is set to give the Government a majority stake in RBS and a holding in excess of 40% in the combined Lloyds TSB-HBOS - could also mean the banks' commitments are added to the public debt.

And adding the liabilities of the banks to the public books could send the proportion of debt to the country's GDP soaring to well over 100%.

RBS alone had liabilities of £1.8 trillion in the first half of 2008 - bigger than UK GDP.
This measure should be less than 40% under the Treasury's sustainable investment rule but already stands at 43.3%, thanks to the impact of nationalised Northern Rock's mortgage debt.

With its large proportion of ordinary shares in the banks announced today the Government is effectively playing the stock market, Mr Loynes added.

"If the plans help to prevent an even worse downturn in the economy, then they may end up having a positive effect on the public finances over the longer-term.

"But public borrowing and debt are already set to rise sharply as a result of the slowdown in the economy already seen," he said.