Byers' decision on Railtrack could add £6bn debt to public finances

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Stephen Byers' decision to pull the plug on Railtrack threatens to add between £4bn and £6bn of debt to the public finances, it has emerged on the eve of the Chancellor's Pre-Budget Report.

Treasury officials are reconciled to having to include Railtrack's debts in its calculations when the Government draws up its balance sheet next April. This is because the transfer of Railtrack out of administration is not expected to be completed by the end of this financial year. Because the Government is now guaranteeing Railtrack's debts, and is paying interest to bondholders, it will have to account for those borrowings on its own books.

Yesterday, the Secretary of State for Transport admitted Railtrack was likely to remain in administration for at least another six months. This would put it beyond the start of the new financial year, which begins in April. "I think it will be a little over six months," Mr Byers told the BBC's Breakfast with Frost programme, adding that a revamped Railtrack would be running "within a year". Railtrack's debts stood at £4bn when it was placed in administration in October and are expected to have reached £5bn by the end of the financial year because of heavy expenditure on phase one of the West Coast Mainline upgrade.

But industry sources have warned its borrowings could be even higher than that because the collapse of the company has thrown its cost-cutting plans into disarray. Railtrack had been planning to make more than £1bn of efficiency improvements but these have been put on hold while the administrators run the company.

On Saturday, it emerged the Government faces an estimated bill of £3.5bn just to keep the company going – £1.7bn more than predicted by Ernst & Young, the administrators, when they were called in six weeks ago. The Government is also faced with the prospect of some train operating companies seeking larger subsidies. There were reports last week that National Express wants to renegotiate its ScotRail franchise because it cannot sustain the losses on the network as Government subsidies decline.

The Treasury dismissed any suggestion that the Railtrack issue would damage Gordon Brown's plans for the public finances.

A spokesman said the Government was providing short-term loans for Railtrack while it was in administration as it was blocked from raising money. However, these loans would be repaid at a commercial interest rate once a rescue package was put together. "This is purely an accounting issue and has no economic impact whatsoever," he said. He declined to say where in the public finances the debt would appear if Railtrack were still in administration in April, saying that was a "hypothetical question".

Tomorrow, the Chancellor will publish his latest forecasts in the Pre-Budget Report. Mr Brown is likely to confirm that the public finances will worsen more quickly than forecast in the March Budget as tax revenues slow and public spending accelerates. Borrowing is likely to be some £15bn greater over the next three years

However, most economists believe the extra borrowing – a combination of a revenue shortfall and new extra spending – will not break his "golden rule" that insists the budget must balance over an economic cycle.

The Chancellor is expected to unveil a package of tax cuts and incentives for business, including cuts in capital gains tax and an R&D tax credit, to offset the severe corporate down turn that followed the 11 September terror attacks.

He will also revise down his forecasts of growth of 2.25-275 per cent next year, probably to a range of 1.75-2.25 per cent.