Nationalisation pushes debt to 100 per cent of GDP

The £37 billion part nationalisation of the leading banks will push public sector debt above 100 per cent of GDP for the first time in half a century, though the process of issuing the necessary securities last night received a cautious welcome in the City.

A spokesman for the Debt Management Office confirmed the Government intended raising the £37bn, and will make a statement today on the exact split between long and short-term government securities. Such is the scale of the operation that a series of auctions will be necessary to raise the funds. The split between gilt sales and Treasury bill sales, as well as the new gilt auction dates, will be announced, following consultation with gilt market participants to ensure an orderly market. It is expected that the project will begin on 20 October, and be completed by the end of the year.

The Government had planned £80bn worth of gilt sales for this fiscal year. At the time of the Budget in March, the Government said it would reduce the amount of Treasury bill sales by £900m from £17.6bn in 2008 to £16.7bn by March 2009. This was to be achieved by reducing the sizes of Treasury bill tenders. There will be no extra auctions in the third quarter of the 2008-9 financial year and the Government will avoid issuing a five-year gilt as the first new auction of its plan.

Jonathan Cloke, head of global government bonds at Legal & General, said: "I think, overall, the auctions will be well received. There will be periodic setbacks in prices, but the underlying economic backdrop is likely to be supportive."

Although the precise classification of the new government commitments will have to await the judgement of the Office for National Statistics, the precedent of Northern Rock suggests there will be some reflection of the nationalisation in the public accounts.

In March the Chancellor said that public borrowing would run to £43bn for the fiscal year and then decline to about £38bn next year and £32bn the year after. However, some economists estimate borrowing could rise to £100bn in 2009-10. That alone would add substantially to the current public sector net debt figure of £632bn, now inflated by £87bn via the nationalisation of Northern Rock and set to go higher after the state took over Bradford & Bingley. That is equivalent to around 45 per cent of GDP, and way above the Government's "sustainable investment rule" limit of 40 per cent. If the whole £500bn package to the banking system were to become a contingent liability and put on the public accounts, that would rise to almost 100 per cent of GDP, a 50-year high.