The government has spent about £150bn over the last year bailing out RBS, HBOS and Lloyds. This has taken the form of being sold shares in these companies and in return giving the banks cash to cover losses and bring their capital (cash) up to regulatory required levels.

In addition the government through the Bank of England has printed £150 bn (quantitative easing) and bought government and other bonds back from the banks. Of this £150bn only about £2bn has found its way back into the financial system – through mortgages. The rest has been retained by the banks to cover losses – £36bn was written off against “toxic loans” in the first half of 2009 by UK banks. A further £25bn is ear marked for the rest of the year.

In addition the government is looking to underwrite up to £700bn of further losses from RBS and Lloyds/HBOS. The future losses and costs are unknown as then must be the size of the cuts.

This means massive cuts to pay for this deficit as well as issuing debt. Over the last 5 years the government has raised about £47bn per year. In 2009 this has risen to £146bn and 2010 the estimate is £180bn. This has to be repaid at some time and there is no guarantee that there will be enough buyers of the government debt. The UK is seen as potential defaulter on debt and the weak economy means low interest rates and a weak pound. This means overseas investors will not want to hold UK assets such as UK government bonds.

UK Government Bond Issuance
2010: £180.0 bn
2009: £146 bn
2008: £47 bn
2007:  £47 bn
2006: £47 bn
2005: £47 bn
2004: £47 bn

The government is in the dark as to much they will have to cut as they do not know how much more the banks can loose, how many Government bonds they can sell and how weak and how long the weakness in the economy will be.

In August they had to borrow £17bn as receipts from taxes was lower and payment on benefits higher.

Cuts in public sector will be the major battle ground around where the financial and economic crisis will be fought because of the scale and the moving goal posts.

Only taking the banks under common ownership and control and neutralizing these losses by turning mortgages into rents and loans into social projects and canceling all the banks derivative contracts.