What Nick Robinson didn

25th November 2011

The debate has been given some gravitas by BBC political editor Nick Robinson, who has thrown the spotlight on government finances in his recent series Your Money and How They Spend It.

He attributes much of the strain in government finances to increased spending on the core areas of health and state pensions, but to date he has not addressed the cost of the bank bail-out and the extent to which this contributed to the parlous state of the UK's finances.

The programme and its online follow-up sparked a huge online debate: Robinson revealed some uncomfortable truths, such as the burdensome and spiralling cost of the winter fuel allowance, that debt interest now costs more than defence, and the rich pay more tax than most people think. In particular, this highlighted that many wealthier people were net ‘losers' from society, putting in more than they take out. This is in stark contrast with the tone of much recent debate on the issue. Jan's response, on the BBC debate was common; "What a surprise! I thought we were the squeezed middle but according to your calculation we are in the top 10% and funding everyone else while we have to scrimp and save. As two middle managers we certainly don't feel well off. We do not have an extravagant lifestyle."

Robinson put the blame for the spiralling costs of the public purse firmly at the door of health and state pensions. This document supports his view: It shows health spending rising from £76,877m in 2006/2007, to £111,153m by 2014/15 and social security costs from £147.6bn in 2006/2007 to £165.5bn by 2014/15, peaking at £170.4bn this year.

But the one area of spending Robinson conspicuously avoided was the bank bail-out. For many, it was this bailout that pushed government finances over the edge. The seductive idea has been that had the government not had to bail out the banks, everything would have been fine and austerity measures unnecessary.

The Guardian has put some recent figures on the cost of the bailout: It gives the most recent set of figures compiled by the National Audit Office: "The headline figure is £456.33bn, down from £612.58bn in March 2010. The peak was a mighty £1.162 trillion. The total outstanding support is 31% of March's GDP."

But, it adds: "Actual money is the smallest part: £123.93bn was provided in the form of loans or share purchases, which required a transfer of cash from the Government to the banks. Another £332.40 billion is in the form of guarantees, where the Government will only provide cash if things go badly wrong." This is shown in the Treasury document above, which shows a hit of £85.5bn in 2007/2008 and £38.3bn in 2008/2009. ‘Financial sector interventions' actually made a net positive contribution to the Government's coffers in 2009/2010. Admittedly, it was only £3bn, but clearly banks also contribute tax revenues.

£123bn is a lot of money, around £20bn more than the National Health budget for one year, and certainly money that most would rather have not spent bailing out rogue bankers, but the UK would have been in dire straits anyway. Annual tax revenues (here) are £447bn and there was a wider annual deficit of £146bn in 2010/2011 (i.e. in a year without the impact of bank bailouts), as outlined here.

The UK's total deficit is now £967bn, as reported in October. Therefore, bailing out the banks has contributed around 13% of the UK's structural deficit to date.

Of course, the problem is muddier than this. The banks contributed to the recession, which contributed to higher government spending and lower tax revenues, which in turn contributed to the deficit, but it is too simple to suggest that the bank bailout created the UK's current problems.

Ultimately, the strains on the UK's state finances have no single, simplistic cause, despite what each side would like to suggest. Any resolution will need to see both parts of the equation addressed.

More on Mindful Money

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Vision for Britain: The future of the UK economy

Vision for Britain: Views from the Political Blogosphere

Twelve UK banks downgraded by Moody's over prospect of less state help

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