Alistair Darling will start final preparations for his second Budget next week in the belief that for almost the first time since becoming chancellor his work will not be overshadowed by a British banking crisis.
Treasury officials believe the “second bank bail-out” in early March has finally stabilised the banking system, leaving Mr Darling and other ministers more time to address the bleak state of the public finances.
Mr Darling became chancellor in summer 2007 but was almost immediately swamped by the Northern Rock crisis, followed by the near total collapse of Britain’s banks in October 2008 and a continuing crisis in confidence in the sector.
However, Treasury officials report that Mr Darling now has far fewer meetings with officials in the department’s financial stability wing. “That is usually a pretty good indicator that things have settled down,” said one official.
Tom Scholar, the second permanent secretary for international issues and finance at the Treasury, is reported to be in Texas enjoying a rare holiday after spending many weekends in the past year in crisis meetings with the chancellor.
Mr Darling’s officials admit there may be more “aftershocks” from the crisis, such as last month’s collapse of the Dunfermline Building Society, but they claim they have developed an expertise in dealing with such problems.
They have been reassured by a general rise in bank shares since the Treasury insured £585bn in toxic assets at RBS and Lloyds Banking Group – the two part-nationalised banking giants. The FTSE All Share Bank index is up 25 per cent since the close of trading on February 28.
There was also relief, and some surprise, at the Treasury when the Financial Services Authority announced that Barclays had passed an extreme stress test and would not need additional capital to withstand a severe downturn.
Although Mr Darling may be enjoying a rare breathing space in the banking crisis, the Treasury knows the part-nationalised banks still have serious problems as they attempt to cleanse their balance sheets. Sir Fred Goodwin’s pension is still the subject of legal advice to the government – and is casting a shadow over RBS, the bank he used to run. Lord Myners, the City minister, remains under pressure over his role in authorising the payment.
Mr Darling and his team will begin what one official called “168 hours of intensive work” on the April 22 Budget, starting on Tuesday. Gordon Brown, who is in Scotland for Easter, will be heavily involved.
Mr Darling is expected to reveal the biggest deficit in peacetime – more than 10 per cent of gross domestic product – with any recovery delayed until the end of this year. With no money to spend, he is expected to focus any additional borrowing on programmes to boost jobs and new industries.
Additional reporting by Brooke Masters
