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Rock holes fiscal rules

• Robert Peston
• 14 Jan 08, 05:40 PM

The pillars of what defined Gordon Brown as Chancellor have begun to look distinctly wobbly since he became premier.

There was the ditching last autumn of that powerful symbol of his entente with Britain’s wealth creators, the 10 per cent rate.

And now the Northern Rock debacle is set to blow out of the water a resonant manifestation of his financial prudence, the sustainable investment rule.

This was one of two so-called fiscal rules designed to stop any Chancellor from spending and borrowing too much.

Under the sustainable investment rule, public-sector debt must be no more than 40 per cent of British economic output or GDP.

Though Mr Brown has frequently been accused of creative accounting to prevent the rule being broken, the ratio has always been below 40 per cent under his tenure – and is currently forecast to be 38 per cent in April.

But if Northern Rock were nationalised, all the troubled bank’s liabilities, minus its liquid assets, would come on to the public sector balance sheet.

That’s about £100bn, equivalent to around 7 per cent of GDP.

It would lift the ratio of debt to GDP from 38 per cent to 45 per cent.

But the Treasury expects to be forced by the to include a big chunk of the Rock’s balance sheet – or perhaps all of it – in the public-sector accounts, whether or not it’s nationalised.

At a minimum, taxpayers’ exposure to the Rock of £55bn – in the form of direct loans by the and guarantees to other lenders – will soon be counted as part of the national debt.

Which would lift the ratio to 42 per cent.

How serious would this be?

Well it would be a big stick for the opposition to use in beating up Brown and the Treasury.

But it shouldn’t affect taxation and spending policy, because the Treasury would regard the Northern Rock debt as a special case.

However it explains why the Treasury has become less afraid to nationalise the Rock – since the breaching of this important rule looks inevitable whether or not the bank is in a formal sense in public ownership.

UPDATE 20:10 The public-sector accounting rules are a bit odd in stipulating that all of the Rock's borrowings should count as part of the national debt, rather than just any shortfall between those borrowings and the value of the bank's assets (which would be a much smaller number - in fact, in theory, there is no such shortfall at all right now). But the Treasury tells me that's how the rules work, and it ought to know.

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Blair's $5m

• Robert Peston
• 14 Jan 08, 10:27 AM

There are times when you see a price and you know that it’s wrong.

One of those was the $1m quoted by many last week and over the weekend for what the huge US bank, is paying Tony Blair for his advisory services.

It felt far too low.

I am not making a judgement about the value of what our former prime minister will actually do for Morgan.

The proof of that will be in the pudding.

But I spend my life speaking to people with money to spend on Blairs and other forms of what is pretentiously known as human capital – and in that world $1m buys a few days of legal or public relations advice, but not continuous access to a politician with a global brand (oh yes) who can pick up the phone to anyone.

Whatever your political bent or view of the Blair years, it would be a national humiliation if the sticker on his forehead said $1000k.

His franchise is worth more.

For a million dollars to be the number on his ticket, Wall Street and the City would be in total meltdown and we would be in the grip of a worldwide recession (we may get there yet).

It couldn’t be the right price – especially since Blair takes advice from a bunch of astute business people and he isn’t famous for knowingly underselling himself.

So when the Daily Telegraph that he is being paid £2m a year, I thought that was more like it.

But it still didn’t feel right.

My intuitive view was that you couldn’t have a Blair for less than $5m a year.

And having now spoken to bankers close to this deal, I am told $5m is what JP Morgan is paying (though Morgan’s and Blair’s office are refusing to publish the pecuniary details).

Which for most of us would be a big pile of wonga – although if Blair had been on the market a year ago, before the pricking of the global financial bubble, he could perhaps have had double.

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