Jeremy Warner: Banking crisis may end up costing taxpayers nothing

Everyone wants better public services, but we've reached a point of disillusionment in the Government's ability to deliver them

The real dividing line in politics is no longer "cuts vs investment", as Gordon Brown would have us believe, "but honesty versus dishonesty". So says George Osborne, the shadow Chancellor, in arguing that whoever is in power after the next election will have to face up to the challenge of making deep cuts in public spending. Mr Osborne says that at least he admits it; the Government, on the other hand, is still trying to pretend that there are choices, despite the evidence to the contrary of its own plans, the broad outline of which are buried in the deeper entrails of the last Budget Red Book.

Two points seem worth making. The first is that the long-term prognosis for the public finances may not be as bad as now widely assumed. The last Budget made some truly heroic assumptions about medium-term growth, which seem most unlikely to be fulfilled, but it also assumed a possibly overly pessimistic outlook for tax revenues, particularly those derived from the City.

In fact, City profitability seems to be recovering rather more swiftly than anyone once thought remotely possible, even as little as four months ago. The permanent loss of output potential for the economy which helped to instruct forecasts for tax revenues may not be as bad as feared.

I'm not trying to argue that once the recession is over all will be fine on the farm once more. Even after the economy returns to full potential, a big structural deficit will remain. Mr Osborne is right in this regard; whichever party is in power will be forced to address it by cutting public spending. It is disingenuous of the Government to pretend otherwise. Even so, the situation may not be quite as bad as assumed.

Most business leaders see few signs of the green shoots proclaimed by a growing number of City economists. This doesn't mean there aren't any. It is not so surprising that signs of economic spring should be observed first in the financial and housing sectors while remaining unnoticed in the rest of the economy. First into the downturn, these sectors were always likely to be the first out.

These green shoots could easily be snuffed out if policymakers move too swiftly to withdraw the loose monetary conditions which are giving them fuel. What's more, there remains a debt overhang of daunting size, both public and private. This will have to be addressed at some stage, which could crimp growth for years to come. Yes indeed. There are lots of reasons for thinking we could be in for a double-dip recession, and/or that any long-term recovery will be anaemic.

But it doesn't have to be that way, and it is certainly the case that even deep cuts in public spending wouldn't come anywhere close to delivering the same long-term fix to the fiscal deficit that a sustained economic recovery is capable of. To the contrary, they might make the economic malaise and therefore state of the public finances even worse. Deep cuts in public spending could end up a zero sum game as far as the deficit is concerned, or even completely counterproductive.

On the other hand, if monetary conditions are kept loose for long enough to make the present, nascent economic recovery self-sustaining, it could be that the fiscal deficit turns out to be less calamitous than Mr Osborne imagines. Already there are positive signs. For instance, the cost to the taxpayer of bailing out the banking system looks ever more likely to end up at close to zero. The Government might even end up making a profit out of it all.

In the US, banks are falling over themselves to repay the capital they were forced to take from the authorities under the Troubled Asset Relief Programme. Now that confidence is returning to financial markets, and the authorities have managed to get a grip through stress testing on the true shape of bank balance sheets, the banking system doesn't seem quite as insolvent as it did in the depths of the crisis. Things were never as bad, it turns out, as the scaremongers said. Either that or banking regulators have pulled off a remarkable conjuring trick.

In this country too, some £2.56bn net of public money has already been repaid by Lloyds Banking Group under a refinancing that was successfully completed last week. With confidence returning to markets, most people now accept that the Government will get back the £37bn it has invested in ordinary and preference shares in Royal Bank of Scotland and Lloyds Banking Group, and may ultimately make a good profit on it.

Several senior sources have told me in the past week that they are now confident the taxpayer will lose nothing from the Government's "asset protection scheme", which has insured some £600bn of potentially bad assets at RBS and Lloyds. This is a complete reversal of the widely held assumption that ruled just three months ago, when it was feared that the Government might lose hundreds of billions of pounds on the scheme.

Both the Treasury and the two banks involved, having now examined the prognosis for these loans in great depth ahead of the scheme taking full effect, have been pleasantly surprised by the outcome.

It seems likely that though the two banks will burn through the first loss on the scheme for which they are liable – equal to 10 per cent of the assets insured – and that the taxpayer will become liable for some loss thereafter, the Treasury ought eventually to come out on top once the very considerable fees being paid by the banks for insuring their assets are taken into account.

Again, no one would have imagined this relatively benign outcome even remotely possible only a little while back. Little less than two months ago, the International Monetary Fund estimated the costs of the measures taken to date by the UK Government to support the banking system at 13.4 per cent of GDP, or around £200bn.

Even at the time, this seemed exaggerated. It's now starting to look like complete nonsense.

This brings me on to my second point. If the outlook for the public finances is no longer as dire as it once looked, and therefore the requirement for public expenditure cuts possibly not as great, the Tories may still be on to something in believing that "honesty" on public spending is what the electorate wants. Far from being a vote winner, Mr Brown's insistence that the main pillars of public spending are safer in his hands than those of the Opposition looks ever more like an electoral liability. As on so much else, Mr Brown has misjudged the political mood.

Rightly or wrongly, when people look at the public sector, they increasingly see waste, declining productivity, poor service and even excess. What they do not see in what Mr Brown cutely insists on calling "public investment" is value for money. Never mind the scandal of MPs' expenses, too many public servants are seen to be on the make and on the take. The apartheid of public sector pensions has added to this sense of grievance.

The public sector is a big employer, but even if all public sector workers voted Labour, they are not a large enough constituency to carry an election. Only 15 to 20 per cent of the workforce is public sector. That government is a much larger proportion of the economy than these numbers suggest is accounted for by the fact that public expenditure also sustains an awful lot of private-sector jobs. All the same, 12 years of "investment" has failed to create a vested interest of sufficient size to swing an election.

Everyone wants better public services, but we've reached a point in the electoral cycle, not unlike when Mrs Thatcher swept to power, of disillusionment in the Government's ability to deliver them. Regardless of how much money is thrown at the problem, there seems little evidence of gain. That we can no longer afford this spending is almost by the by. If it seems to be paying only for a self-sustaining bureaucracy, public "investment" won't be the vote winner it once was.

Start your day with The Independent, sign up for daily news emails
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
Down-to-earth: Winstone isn't one for considering his 'legacy'
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower