TPA briefing paper on the £50 billion bail-out

October 08, 2008 5:12 PM

Download the full paper (PDF)

The TaxPayers' Alliance today publishes a new briefing paper on the financial crisis, which forms the basis of our response to the bail out plan and which we hope will be of use to journalists reporting the issue. The briefing also outlines several ways in which the Government can and should limit the amount of taxpayers' money the banks need. The briefing paper can be read here.

Key points

The Government has turned to taxpayers to fund their £50 billion bailout of the banks without fully exploring other measures that could have contributed to resolving the financial crisis.

A £50 billion capital injection commits significant amounts of taxpayers’ money - £2,000 per household in Britain. This creates a number of issues:

  • Taxpayers’ money will be exposed to significant risk for an extended period of time. Funds will need to be raised now and that borrowing will pose a significant risk to the economy over the medium term.
  • The authorities charged with protecting taxpayers’ interests are unlikely to be effective, particularly if they are required to outwit financial institutions.
  • There will be a huge public backlash if this money is seen to be used inappropriately, to support high levels of remuneration and bonuses.

Examples responses the Government should have pursued first, and should now consider to limit the need for injections of taxpayers’ money, are:

  • Suspending mark to market rules that cannot function effectively in the absence of a liquid market for many key assets. This would significantly ease the pressure on many banks’ asset sheets. If mark to market had been in place during the 1980s all 10 of the largest US banks would have become insolvent.
  • Big interest rate cuts: While inflation is currently quite high it is widely expected to fall substantially in the coming year. Cuts in Bank of England rates might have a limited effect on market rates but it will help some borrowers more immediately and any effect on the market rate would be valuable.
  • Strengthening the credibility of deposit insurance: 97 per cent of depositors were covered even before this week’s increase in the deposit protection limit to £50,000; however it is understandable – in the wake of crises such as that at the Rural Payments Agency – that ordinary people are not entirely confident those guarantees protect their interests.

Matthew Elliott, Chief Executive of the TaxPayers’ Alliance, said: 

“The Government is using taxpayers’ money as an easy way out, and haven't fully explored other options that don't put £50 billion of our hard-earned cash on the line. With ordinary taxpayers' money at stake, they must put mechanisms in place to ensure that the money isn’t frittered away on excessive bonuses and to make sure that it is not wasted. The Government must now explore other options to reduce the amount of taxpayers' money the banks need, including making deposit protection more credible, suspending mark to market regulations and cutting interest rates. The Government say they have the interests of hard-working taxpayers at heart, now they need to prove it.”

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