Creative accounting

The Government will initially have to borrow £25bn to buy preference shares in the banks and Mervyn King thinks £50bn is a more realistic figure. The Treasury is betting that this figure will not be counted as "public sector net borrowing" as it will be an off-balance sheet transaction. (Such public accounting definitions are determined by the Office of National Statistics). If it were considered to be public borrowing, the UK deficit would rise to over 6% of national income this year. The question is whether the Government has control over the banks when it lends them the money. The Treasury has said that it will have a say in the dividend policies and executive compensation practices of those banks whose preference shares it owns and will require them to support lending to small businesses and home buyers. If the ONS decides that these factors mean that the Government does have effective control over the banks, they must be classified in the national accounts as "public financial corporations" and their liabilities must be added to public sector net debt, meaning that GB's pledge to keep PSND at 40% of national income is blown out of the water.