John Redwood

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Northern Rock

15 November 2007

Writing on his blog, www.johnredwoodsdiary.com, John Redwood today asks where the £23 billion made available to Northern Rock came from, and how this will be accounted for in the Government’s reports to Parliament and the country.

The full text of John’s blog entry follows:

“The Chancellor is ever keen to claim a Tory “black hole” in the Opposition figures for any odd billion needed for a tax cut or a spending improvement. Yesterday when I asked him about the £23 billion “hole” in his own figures he was unable to answer. When I asked Peter Hain at the end of the debate the government still did not know. Ministers had failed to use the hours of the debate to get properly briefed on this important subject - yet they raised Northern Rock themselves in the Chancellor’s opening remarks.

The Chancellor authorised the Bank of England to make £23 billion (so far) available to Northern Rock. The Bank of England is a company wholly owned by the Treasury on behalf of taxpayers. It is a relatively small bank, with total equity of just £1.8 billion, and a total balance sheet of around £40 billion before the Northern Rock crisis.

I asked the simple question, where did the £23 billion come from? Which account? How will it be accounted for in the government’s reports to Parliament and the nation?

The answer has to be that the public sector has borrowed the money to lend to Northern Rock. I appreciate they believe they will be repaid it as some point - maybe some of it not for several years according to latest leaks - but in the meantime it is money spent. As the public sector overall has been spending more than it raises in taxes, and as it is heavily in debt, the most likely source of the cash is borrowing. Buying a mortgage portfolio should have the same effect on public spending and borrowing as buying property or vehicles or any other public asset.

It appears from the Banking returns of the Bank of England that there has been some reduction of the other assets on the Bank’s balance sheet to make some room for the Northern Rock loan which helps. But it also appears that the Bank has increased its overall borrowings to help finance this loan, which means public borrowing as a whole has increased. We should be told how we are paying for this special finance. We should be told what guarantees the Treasury has offered the Bank of England to enable it to take such a large loan onto its books, distorting prudent management of risk at the Bank of England. We should expect the Chancellor to know how it was done, as he authorised it. We should expect him to tell us, as he is always urging the commercial banks to be more open about their assets and liabilities. As this is our money at risk we have a right to know. I will go on asking these questions until we get an answer”.