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Britain lends Iceland £2.2bn in deal to pay back investors
Paul Waugh, Deputy Political Editor20 Nov 2008
BRITAIN has lent Iceland £2.2 billion as part of a deal to compensate savers hit by the Nordic banking collapse, it emerged today.
The loan, part of an emergency IMF package to prop up the Reykjavik government, is a way of formalising cash targeted at Britons, the Treasury said.
Chancellor Alistair Darling has given a guarantee that all deposits held by British retail investors will be backed by the taxpayer. The cost of the scheme is more than £2 billion and now the Treasury is classifying the sum as a loan that Iceland will have to repay.
The terms of the repayment of the loan have yet to be agreed.
The deal emerged as new figures showed that Government debt in the UK had reached new levels, with the worst October borrowing figure in 14 years. The state borrowed a net £1.4 billion last month, compared with a net repayment of £1.8 billion a year earlier, according to the Office for National Statistics.
Treasury Chief Secretary Yvette Cooper shrugged off the figures, claiming that next Monday's pre-Budget report would show that higher borrowing, tax cuts and spending were all vital to combat the recession.
In the clearest signal of Labour's main attack line on the issue, Ms Cooper said the recession would be “longer and deeper” if the Government followed the Tories' opposition to higher borrowing. Net borrowing since April now stands at £37 billion — almost double for the same period last year. Today's figure for the first seven months of this financial year comes close to the £43 billion projected by Alistair Darling for the entire year.
October is usually a strong month for tax receipts but this year was the first time since 1994 that net borrowing was recorded. The figures gave growing evidence of the impact of the slowdown on tax revenues — even before the UK's recession is officially confirmed.
Income tax receipts were £1 billion below a year earlier, corporation tax revenues were flat and National Insurance contributions dropped by £300 million. Overall growth in receipts was virtually flat but total current spending was more than £2 billion ahead of the previous year.
The Government's current budget surplus was reduced to just £1 billion — compared with £4 billion 12 months earlier. “These figures put the Government on course to borrow a record-breaking £67 billion this year,” shadow chancellor George Osborne said.
Ms Cooper said that Tory opposition to the “fiscal stimulus” would lead to more unemployment and that borrowing had to rise to help “reflate” the economy. “If we don't act, our economic problems will last longer and run deeper,” she said in a speech in Westminster. “More businesses will go under.”
She also sought to deflect criticism by claiming that a new round of government efficiency savings could yield £5 billion more than expected.
Whitehall spending on lawyers, IT, and consultants will all be slashed, while changes to back-office and personnel will result in big savings. Departments will also save “hundreds of millions of pounds” by switching to cheaper energy deals.
The money saved, which would come on top of the £30 billion projected by Chancellor Alistair Darling, will be used to help pay for tax cuts, countering the Tories' charge that the tax cuts will be “unfunded”.
Labour hopes that its Whitehall cuts programme will also restrict David Cameron's room for manoeuvre on cutting government spending.
The Tory leader this week announced he would balance the books by seeking cuts across the whole of the public sector.
Ms Cooper said today Labour was determined not to cut back on essential investment in the recession, but that efficiencies could be found. “At a time when families are feeling the pressure, they want be assured that the public sector is doing its bit and cutting out waste,” she said.
Employment minister Tony McNulty suggested there may have to be tax increases to pay for increased borrowing. “It is but one of a range of scenarios,” he told a Westminster lunch. But he insisted that if the fiscal measures worked the downturn could be “short and shallow”.
Reader views (2)
Why would we do that?!?
- Georgie, Islington, London, 20/11/2008 20:20
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Does anyone honestly believe that Iceland will ever pay back all this?
Also, why should we all have to bail out the people and companies, and even local councils who were out to make a fast profit. They gambled, they lost ! Surely it should be law that councils funds (from all the taxes they collect from the public) should stay in this country for investment at home!
- Joanna Carling, london england, 20/11/2008 16:46
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