Just like compulsive shoppers who dip into their overdrafts constantly, the Government borrows money when the income from taxes does not cover its spending.

However, just like so many of us tempted by bargains on the high street, the Government can find itself spending more than it budgeted for. In March Alistair Darling said that the Government would borrow about £43 billion this year but economists now put the figure at nearer £65 billion, or about 4.5 per cent of GDP.

This is higher than the European recommendation of a maximum deficit of 3 per cent and is the equivalent of each taxpayer racking up nearly £2,000 in debt. When this year’s borrowing is added to the money the Government already owes, it could push public sector debt to nearly half of the country’s GDP.

While piling up debts is never ideal, as it is taxpayers who will ultimately pick up the bill, this surge is particularly significant as Gordon Brown, then the Chancellor, pledged that debt would never exceed 40 per cent of GDP over an economic cycle when Labour came to power in 1997.

This rule remained intact until Northern Rock was nationalised this year. The move pushed debt to 43.4 per cent of GDP.

The Government still does not admit that it has broken its fiscal rule - and it has a point. The Office for National Statistics (ONS) has included Northern Rock’s liabilities in the public finances in line with international accounting rules but there is no space in the books for the nationalised bank’s assets – the payments from borrowers paying off their mortgages. Economists say that the Government will wait until the bank has been wound up before taking into account the effect on its finances.

There are similar issues with the nationalisation of Bradford & Bingley’s mortgage book and the £37 billion bailout of the banks. The ONS must decide if and when it will add these expenses to the balance sheet, as well as considering whether the Government’s ownership of a large chunk of RBS shares give it a controlling interest. If so, the bank’s £1.2 trillion of liabilities, equal to nearly 100 per cent of GDP, will be added to the debt tally, taking it to more than double the 60 per cent limit recommended in the Maastricht treaty.

It is not just the financial crisis that is to blame for the breaking of the 40 per cent rule. Even discounting the recent bailout and Bradford & Bingley, economists forecast that the deteriorating tax take will push debt well above the 40 per cent threshold.

The Government’s much vaunted Public Private Initiatives have also flattered its finances over recent years. Instead of borrowing to pay up front for a new school or hospital, the scheme allows the cost to be spread over a longer period, helping to get projects off the ground without immediately bumping up the debt figures. The Institute for Fiscal Studies said that if the Government had paid up front for all such projects agreed so far, its debt could be nearly £60 billion higher.

There are also concerns about other possible liabilities that could push the real debt figure even higher. The government pledge to guarantee Network Rail’s £18 billion debts have led some to argue that this should be included in the public finances.

The other bone of contention is the liabilities for public sector workers’ future pension payments. Some economists argue that at least a portion of the £650 billion bill should be included in the Government’s books.

Explore Economics

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