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Gov’t hiding banks’ debt, says New Star’s Ward

The Government’s decision to add Lloyds Banking Group and RBS to the public balance sheet will give an artificial boost to public finances, says New Star’s Simon Ward.

Wards says the reclassification by the Office for National Statistics of the RBS and Lloyds Banking Group as public corporations will be a big help to the efforts of the chancellor, Alistair Darling, to limit fiscal red ink.

“The banks’ underlying profits will be booked as public sector income, significantly reducing net borrowing,” says Ward. “At first sight this looks odd since the banks suffered a combined operating loss before tax of £49bn in 2008 and may remain in the red in 2009. But ONS guidance, however, indicates that the profits definition to be used will exclude dealing and investment losses, credit impairments and goodwill write-downs.”

Ward says as a result of the reclassification, profits before these deductions fr the banks were a combined £27.7bn in 2008. RBS and Lloyds are to be included in the public sector from 13 October 2008.

Ward adds: “The chancellor is widely expected to announce a large upward revision to his public sector net borrowing forecast of £118bn in 2009-10 in next month’s Budget, reflecting a much deeper recession than projected by the Treasury last November.

“The inclusion of the banks’ profits, however, implies that Darling could announce little or no increase.”

As a result, Ward says the effect of reclassification is entirely artificial: he says that although they are not included in public borrowing, the losses suffered by the banks are real and have been reflected in the value of the government’s shareholdings.

“With no improvement in the public sector’s true financial position,” says Ward, “the classification change does not create additional fiscal ‘room for manoeuvre’”

When the classification was announced, the ONS announced that the banks would boost public net debt by between 70 and 100 percentage points of gross domestic product, from 47.8% currently.

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