57.9% of the Royal Bank of Scotland will soon be owned by the government, as shareholders have only bought out a tiny amount of the new shares that were offered to them.

The small take-up had been predicted, and is likely due to the fact that the offer price of shares was 65.5p – 10p higher than the price at which shares were trading.

The Royal Bank of Scotland also owns NatWest, and the share issue was part of the government’s plan to recapitalise banks.

The government will now pay around £15 billion for its share in the bank, and will also buy £5 billion of preference shares.

Existing shareholders at the bank bought almost 56 million shares, representative of just 0.24% of the offered new shares. This cost them £36.7 million between them and made an immediate paper loss of £5.6 million.

The fact that the remainder of the shares has been bought by the government, means that taxpayers have made an immediate paper loss of £2.4 billion, based on yesterday’s closing share prices.

Stephen Hester, Chief Executive of the RBS has said: “We regret that existing shareholders did not take up their pre-emptive rights but understand that the market sentiment towards the banking sector made this uneconomic in the short term.

“There remain substantial uncertainties and challenges outside our control but for our part the job is underway.”

At a meeting last week, shareholders of RBS voted to take the government money, even though there will be strings attached, such as the bank losing freedom in areas like executive pay and dividend policy.

It was also agreed that normal lending practices would be resumed. Therefore, the Bank is announcing that it will guarantee overdraft rates and contracts for its business customers for at least a year.

UK Financial Investments Ltd will hold the government’s shares of the Bank. This is in an effort to maximise value for taxpayers and try to prevent politicians from making business decisions about the Bank.

The chair of this company will be Philip Hampton who is also chairman of Sainsbury’s and was also the director of Lloyds TSB.

The Royal Bank of Scotland is, unfortunately, just one of many banks that has been exposed to the debt on the US sub-prime loans and felt the negative effects of this association.

The Bank has also felt the effects of the collapse of the inter-bank lending, as the whole industry worried about which fellow bank they could afford to lend to.

Critics are also saying that the Bank also paid too much for ABN Amro last year, which is another reason for its current problems.

The Bank led a group that paid 71 billion Euros (the equivalent of £61 billion) for the Dutch bank in October last year.

Chancellor Alastair Darling has revealed that while he may be planning on cutting taxes in his budget, the government will also be borrowing record amounts in order to reduce the effects of repression as much as possible.

According to his pre-Budget report, high income homes will also face more tax, and National Insurance contributions are also set to rise across the board, as part of his “exceptional” measures in order to reduce the effects of recession next year.

Alcohol, tobacco and duty prices are set to rise enough to offset the VAT cut from 17.5% to 15%.

Conservative Chancellor, George Osborne, has accused the Labour party of trying to bring Britain “to the verge of bankruptcy” as the plans detailed in the pre-Budget plan will double national debt, which is set to reach £118 billion next year.

He has accused the government of creating a “huge unexploded tax bomb timed to go off at the time of the next economic recovery.” And also that Mr Darling had offered “temporary tax giveaways paid for by a lifetime of tax rises on the British people,” and that the UK had been “mortgaged to bail out the mistakes of the past.”

Liberal Democrat treasury spokesman, Vince Cable has also said that the government’s plans would not be enough to boost consumer spending, and that they would do better to “put money directly in the pockets of low paid workers by cutting their income tax.”

Mr Darling has also reduced the predicted growth of the economy for next year from 2.75%, to between -0.75% and -1.25%, the biggest downward revision recorded.

On the other hand, he has said that the government will inject either £20 billion or 1% of GDP into the economy in order to get things moving again, leading to an increase in government borrowing.

There is also expected to be a cutback in government spending, with the rise predicted to be at 1.2%, lower than in recent years.

The 2.5% VAT cut will come into effect on Monday, just in time for the peak in the Christmas shopping period, and will aim to put £12.5 billion back into the pockets of consumers over the 13months during which it will last.

Also, on top of their £10 bonus, pensioners will receive a one-off payment of between £60 and £120 in January.

The increase in duty on alcohol, tobacco etc however, will be permanent.

In measures that aim to try and get back some of the VAT that the government will be losing, top rate tax will increase to 45% in 2011 for people earning over £150,000 per annum from April 2011, and all National Insurance contributions for both employees and employers will be raised by 0.5%.

The starting line for National Insurance and income tax line will be brought into comparison with each other so that anyone earning less than £20,000 per year will not pay more contributions.

In defence of borrowing rate being almost double for next year than 2008, the Chancellor has said that “in these extraordinary circumstances allowing borrowing to rise is the right choice for the country. Taken together these steps will ensure money flowing into the economy when it is needed most, but we can reduce borrowing when growth returns.”

Other measures include speeding up the introduction of planned rises in child benefits, along with measures that aim to help small businesses struggling due to the credit crunch.

He has also announced that drivers will face a more gradual introduction of new vehicle excise duty, at only a £5 increase per vehicle next year.

And, of course, there was mention of work on motorways, schools and repair to council houses by bringing forward £3 billion of state spending.

Also for home owners, a scheme that covers mortgage interest payments for those that have lost their jobs will cover up to £200,000 of mortgages.

The other major change in order to try to boost the economy is that this year’s £120 income tax personal allowance per year for basic rate tax payers will stay and be increased to £145.

After a 16 year high, UK inflation fell in October, as oil and transport costs, as well as fuel prices, fell.

The Consumer Price Index (CPI), which was at 5.2% in September, has fallen to 4.5% in a month. According to the Office for National Statistics (ONS), this is the biggest month-on-month drop in 16 years.

The Retail Prices Index (RPI) also fell from 5% to 4.2%, its biggest fall since 2003. This index includes house prices, and is often used for agreeing pay settlements, or calculating the up rating of benefits like pensions.

Core inflation, which includes the likes of food, tobacco and alcohol, fell from 2.2% in September, to 1.9% last month.

The ONS has said: “The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year… The decrease this year was triggered by a sharp fall in the price of crude oil.”

Other things that may have contributed to the decrease are the fall in prices of both air and sea transport, and from food and non-alcoholic drinks, as the prices of meat were cut in the supermarkets.

The UK economy shrank for the first time since 1992 this year, falling by 0.5% in the third quarter of 2008.

The Bank of England has said inflation could fall below its target of 2% next year, and could even drop as low as 1%.

All of this led to the Bank of England lowering its key Bank Rate in October to just 3% - its lowest level since 1955.

Chief economist at the British Chambers of Commerce, David Kern, said: “Following these [inflation] figures, it is clear that UK interest rates will be cut further, most likely to 2% in early 2009.
“One cannot rule out rate cuts below 2% later next year.”

The slowing UK economy is also pulling down cost-of-living prices, due to falling food and fuel prices. The fact that crude oil is remaining at under $60 a barrel is primarily responsible for decreased fuel prices.

Senior economic advisor to Earnest & Young ITEM Club, Hetal Mehta, has said: “With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year.
And while it is still unlikely on the CPI measure, the prospect of deflation cannot be ruled out.”

Figures from the ONS also show that output prices (the prices of food leaving the factory) dropped by 1% in October.

Input prices, on the other hand, (the cost of the raw materials bought by the manufacturer) dropped by 5.6% in October, the biggest drop in 12 years.

The Governor of the Bank of England, has admitted that it’s very likely that the RPI will reach negative percentages next year.

The Bank is also expected to drop its interest rates to 2% in December, its lowest level since the 1930s.

Although a short period of deflation would not be too bad, a prolonged period could be disastrous, as consumers hold off buying goods thinking they will be cheaper later. This can lead to firms selling less and wages being cut, and overall, less money to spend meaning demand falls even further.

Recession in the UK will be longer and tougher than originally suspected according to business group CBI, which estimates that the economy will shrink 1.7% in 2009. This is hugely different to the 0.3% growth that was predicted in September.

The group also believe that unemployment could peak at 2.9million by 2010, compared to the current 1.8 million total.

Lord Mandelson, Business Secretary, defended the government’s plans to increase borrowing in order to try to boost the economy by saying: “We have to take every action we can as a government.”

He also said that the current recession is not the government’s fault, and that it is their job to do everything possible to make the recession “as short and as painless as possible”, adding that “now people will say but you’re resorting to borrowing in order to deliver the stimulus that’s needed. My answer to that is what is the alternative?”

Unite, are said to be drawing up a 10-point plan to invigorate the UK economy. This will include an increase in public spending; a halt to house repossessions; and a call for over a million affordable new houses to be built.

Along with these changes, Unite also want more support for manufacturing, tighter regulations on energy firms’ profits, tighter regulations of the financial sector and increased worker rights along with many more changes they believe will boost our current economic state.

Although the CBI report said that it hoped the recession would be “shallow”, October’s banking sector turmoil suggests otherwise.

Between July and September this year, the UK economy shrank for the first time in 16 years, suggesting we are in a repression, though technically, this can’t be confirmed until the fourth quarter statistics are in, it is expected that the fall in economic growth will continue.

The CBI expects that the economy will continue to contract by 0.8% in the final quarter of the year, and expect the economy to continue to shrink in the subsequent three quarters, before beginning to recover in 2010.

CBI’s deputy director general, John Cridland, has said that problems with the banking system over the last couple of months have sent consumer and business confidence plummeting.

He said that: “given the speed and force at which the downturn has hit the economy, we have reassessed and downgraded our expectations for UK economic growth, but the fast-moving and global nature of this crisis means it is impossible to look far ahead with any certainty.
“What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting.”

According to Mr Cridland, the slowdown in the economy is due to a “double whammy”.
“First of all the banking crisis had really deep effects on the availability of credit for business – nor only credit from the banks, but credit insurance as well – and that is now proving troublesome for an awful lot of businesses small and large.
“Alongside that, the impact of relentless bad news every day on the news has caused people to stop spending – companies as well as individuals – so there’s a sharp fall in demand for products and services and businesses having to batten down the hatched.”

The Bank of England is warning that Britain has probably entered a recession which is likely to continue well into 2009.

In the Bank’s Quarterly Inflation Report, it has warned that the economic landscape has dramatically altered since August, and it now predicts that the UK’s economy could shrink by a further 2% over the next year, and to sink to 1% by 2010.

Mervyn King, the Bank of England’s governor has said: “[It is] very difficult to know precisely how long we’ll be in recession…I think we probably are in recession now.
This is a difficult and unprecedented time, but we will come through this… We will come out of recession and get back to a period of low and steady inflation and economic growth.”

This comes after records show that unemployment has hit its highest levels in 11 years, while the value of the pound plummeted further on international markets.

The Bank’s central projection is for economy to contract sharply next year. This however, is subject to change if the government introduces further fiscal stimulus to the economy.

Ross Walker from the Royal Bank of Scotland has said that markets were surprised by how big the fall in inflation that the Bank of England had projected was, but he added that he believes: “conditions are going to get worse before they get better.”

Just last week, the Bank of England shocked the country by cutting its UK interest rates to 3%. Mr King said reasoning behind the sharp fall was “because the facts had changed”, and not because the Bank was caught unawares by the crisis.

If the Bank’s rates do fall below 2% as predicted, this will be their lowest rate of interest since it was set up in 1694.

Mr King also admitted that Retail Price Index, including house prices, could fall into negative percentages as interest rates fell. The fact that oil prices are still falling will not help matters. They are now well below $60, less than half the price it peaked at during the summer.

Charles Bean, deputy governor, predicts that the contraction of the economy should be similar to the recessions in Sweden, Finland and Norway in the 1990’s, which were quite short. He also emphasised that the government have responded relatively quickly to the threat, therefore the effects of the recession shouldn’t be extended too far.

Putting a positive spin on the 20% decline of the pound, he said it could help boost exports and pull the economy out of recession.

The governor pointed out however, that if the value of the pound falls much further, there could be further inflation in the future.

As part of its action against recession, the government announced it would spend billions to protect financial systems and boost the UK economy.

According to Mr King, there is stronger argument for fiscal stimulus than before, because the banking crisis meant that monetary policy was less likely to be effective.

However, he has also warned that any fiscal stimulus must be temporary and consistent with the long-term path of fiscal discipline, otherwise long-term interest rates would rise, undoing some of the effects of any economic increase.

Prime Minister, Gordon Brown has also said that he would have to employ “very special means to deal with special circumstances” and that the economic changes needed to be world-wide in order to be most effective.

It is thought more information on this will be included in the Pre-Budget Report, due out on 24th November.

Prime Minister Gordon Brown has sparked talk of possible tax cuts by saying they could help support consumer spending. He also commented on the tax cuts that are planned in the US and Germany and said that countries must work together to tackle the global economic problems we are currently facing.

He has said that he is looking into “everything” that could possibly help the economy and would announce the details of the decisions made within days.

Conservative leader David Cameron has said he believes the Tories will announce “tax change to encourage businesses to take on workers”, and the Liberal Democrats have already admitted they would cut taxes for those that are paid less.

Gordon Brown has said that potential tax changes are a matter for the pre-Budget report, which is due out next week. But also said in a speech that “people are looking to governments for action” at the moment, drawing attention to the plans that Germany, the US and China have to help their economy, which mostly include tax cuts.

He said: “With Britain continuing to lead the debate, economic recovery will work better if we all work together…The benefits of any individual country’s fiscal action will be all the greater if this is part of a concerted and fairly distributed international response to maintain global demand.”

When asked about the possibility of tax cuts, Mr Brown replied that petrol duty had been frozen and people were already getting £120 back in their income tax after the government raised tax allowance following the 10p tax row.

“What I’m determined to do is get all countries around the world trying to get their economies moving again, and one way you can do that is by putting more money into the economy by tax cuts or public spending rises but that’s something we have got to look at in the next few weeks.” He told GMTV.

There have been reports that the Conservative party may propose National Insurance payments holiday for new workers in order to encourage employers to take on more staff, in their tax proposals.

Cameron has also warned against permanently damaging public finances, and is criticising the government because it had a large budget deficit before the recession even began. He has suggested that any new proposals should make clear where the money is coming from in the first place to stop the governments’ excessive borrowing.

On the other hand, spokesman for Mr Brown said that increasing borrowing is now the accepted view across the world, and that the government would have to look at all the issues relating to tax and spending.

Nick Clegg, Liberal Democrat leader, has said that they have been pushing for tax cuts for the middle and low income earners for months, adding that “We are the only party saying that tax cuts have got to be big, they have got to be permanent and they have got to be fair.”

He also said that in order to make the system fairer, “loopholes” that benefit only the rich on capital gains and tax relied on pension contributions had to be abolished, in addition to clamping down on tax avoidance and introducing more green taxes.

Ken Clark, the former Chancellor has been recorded as saying that previous efforts to boost the economy had failed and so it’s time for VAT cuts in order to encourage customers back into the shops.

The Royal Bank of Scotland has publicised today that it expects to make its first annual loss this year as it reveals more write-downs on assets affected by the credit crunch.

The lender has said that bad debt charges along with recent write-downs totals £206 million in the third quarter alone, this is on top of the £5.9 billion already lost in the first half of the year.

RBS has detailed plans to raise £19.7 billion as part of the government’s bank bail-out plan, but RBS boss Stephen Hester has told the BBC that making a profit will be difficult.

Accounting changes relating to the way securities are classified provided a £1.2 billion boost, or the RBS’ third quarter write-down would have been much higher. The bank have admitted that its operating profit in the first nine months of 2008, before the credit market write-downs was 8% lower than this time last year.

Mr Hester said “the scale of the market disruption and the economic downturn that is happening as a consequence means that credit losses are rising very sharply…I suspect that people may conclude that profits will be difficult to achieve this year.”

Mr Hester has also suggested that a lot of RBS’ problems stem from their lending too much money when times were good. Due to its investments it became too exposed to the disastrous sub-prime loans to US homeowners with poor credit histories. Also it bought Dutch bank, ABN Amro, at the height of the economic boom.

BBC business editor, Robert Peston has said that it is momentous that a bank that can trace its history back nearly 300 years, and has survived one set of multi-billion pound losses on the sub-prime phase of the credit crunch, is experiencing its first ever full-year loss.

He added that it would be tested now by the rising impairment charges on more conventional lending as recession makes life more difficult for individual companies with big debts.

The Royal Bank of Scotland is now looking to raise up to £15 billion from investors, and are therefore selling shares at 65.5p each.

If these shares are not taken up, the government will acquire them, along with their directly buying preference shares in the bank worth 5 billion pounds in total. The terms of this government agreement will mean that dividend payouts will be restricted, directors’ pay will be limited and the banks will be required to pay 12% each year in interest on the preference shares.

RBS has said that it would buy back the preference shares “as soon as it is prudent to do so”, which would allow them to start dividend payments again. Bank boss Mr Heston has suggested that he would be disappointed if he could not pay dividends again in 2010.

Barclays bank has luckily raised cash from the Middle East, but Lloyds TSB and HBOS are two other banks that will be involved in the government’s bank rescue plan.

Lloyds bank has revealed today that its purchase of HBOS could save at least £1.5 billion each year, more than was originally expected. This is likely to mean a heavy job loss in both banks.

With HBOS being the hardest hit of the two, both banks have also revealed further write-downs on assets that have been badly affected by the credit crunch. They have also shown details for plans to raise up to £17 billion as part of the government’s bank rescue plan.

However, Unions are warning  banks to think of the human cost of the take-over, and to avoid redundancies as much as possible.

Lloyds are not revealing how many jobs will be lost because of the merger, but have cryptically said that there was scope for “significant cost savings” from combining the branches and back offices of both the banks.

BBC business editor Robert Peston is saying that the estimated £1.5 billion in savings that the merger will generate is much higher (50%) than expected. This is good because it means bigger dividends coming in for holders of Lloyds TSB and HBOS, but could also result in many job losses.

The two banks between them employ around about 140,000 people, and it is worried that up to 20,000 jobs could be lost due to the take-over of HBOS.

Unite union joint general secretary Derek Simpson has said: “We believe that if this takeover is managed properly, with the full involvement of the union, compulsory redundancies can be avoided.”

There is also anger at the banks refusal to give over more specific details about how many jobs will be lost and said that Lloyds and HBOS are “fuelling speculation while leaving their worried staff in the dark.”

Both banks have however, admitted that the market problems had reduced their earnings.

Lloyds said that its third quarter profits at its wholesale and international division had been hit by a £270 million write-down on assets that had been hit by the world-wide credit problems.

HBOS has revealed that write-downs and losses on bad debts for the first nine months of this year  is now £5.2 billion.

Between them, Lloyds and HBOS are looking to raise £13 billion from investors, which, if are not taken up, the government will acquire them.

The government will also directly buy preference shares in the two banks, totalling £4 billion, and under the terms of their agreement, dividend payouts will be restricted and directors’ pay limited and the banks required to pay 12% interest per year on their shares.

There were reports over the weekend of rival bids, but Lloyds TSB and HBOS have both said they are committed to the merger. When combined, the new bank will be called Lloyds Banking Group.

Since six weeks ago, when the government first brokered the deal to save HBOS, Lloyds has renegotiated the terms of its takeover twice in order to reduce the amount of stock it will give HBOS shareholders. They will now get 0.605 Lloyds shares for every HBOS share, compared to an earlier offer of 0.833, and earlier still there were plans for a one-for-one share swap.

According to figures released by the Commerce Department, the US economy is also now falling, with the annualised rate between July and September declining to 0.3%. This follows a 2.8% increase in the three months prior to this.

Gross Domestic Product (GDP) figures, were better than was expected, but still show that sharpest reduction of the American economy since 2001.

The fact that consumer spending shrank for the first time since 1991, by 3.1% will not help matters, especially as consumer spending is what makes up around two-thirds  of the US economy.

Some of the biggest US companies have also released information about their results for the July to September period, coinciding with this data. This data includes that:

• CBS broadcasters made a loss nearly $12.5 billion (nearly £5.6 billion) this quarter, including a write-down of $14.12 billion-worth of media assets.

• Motorola, who reported a profit of $60 million this time last year, now report losses to be at around $397 million last quarter. This is mostly said to be due to falling mobile phone sales.

• International Paper have done a little better than expected, but are still reporting profits of $149 million, compared with their $217 million profit recorded in the third quarter of last year.

• Eastman Kodak’s profits have actually increased to around $96 million, compared to $37 million this time last year.

• Colgate-Palmolive are reporting profits of almost $500 million between July and September this year, a rise of 19% from last year.

It has been revealed in their GDP data, that US spending on ‘non-durable’ goods, such as paper and food have dropped at its sharpest rate since 1950.

According to the UK standard definition, recession is applied when a country shows negative growth for four consecutive quarters. The US is joining many other major countries, including us, in that it is now half way towards that, as it is showing negative growth for its second consecutive quarter over-all.

According to US rules however, the country may exhibit negative growth for four consecutive quarters, but is not in recession until their National Bureau of Economic Research declares it.

Despite this, the Federal Reserve has shown concerns about the US economy, and has cut its key interest rate from 1.5% to 1% on Wednesday.

Bill Walsh, president of Hennion and Walsh in New Jersey has said that: “consumer spending is about 70% of the GDP and this looks like the lowest it has been in two decades, which goes to show that in the fourth quarter, we are going into recession.”

Accompanying the GDP figures were figures from the Labor Department, which show that there were 479,000 new claims last week for jobless benefits, the same number as the previous week. This again supports the theory that, like ours, the US’ economy is in trouble and it is seeping through to their job market.

The Bank of England has today revealed worrying figures in its latest bi-annual Financial Stability Report (FSR), showing that the world’s financial firms have now lost £1.8 trillion due to the continuing credit crisis.

It has also warned that 1.2 million homeowners could be facing negative equity if house prices continue to fall as sharply as they have been.

The Bank of England’s new estimate on global losses doubles the prediction made in May. This news comes just after it was revealed recently that the UK would be putting £37 billion into Royal Bank of Scotland, HBOS and Lloyds TSB.

The Bank of England is saying that there may be “a need for a fundamental rethink of how to safeguard against systemic risk,” and warning that UK banks could possibly now be looking at stricter measures in order to avoid another credit crisis in the future.

According to the Bank of England’s deputy governor Sir John Gieve, this “fundamental rethink” could mean increasing capital and liquidity requirement and institutions.

According to the FSR, the UK banks expanded too quickly when times were good, and lacked solid foundations to cope when things then turned bad. This is one of the major things that needs to be addressed in the future as part of the “fundamental rethink”.

Mr Gieve has also said “we need to establish restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.”

Some of the measures that are being debated in the FSR include “leverage ratio”. This would peg back the growth in banks’ balance sheets to the size of their capital.

Also, “dynamic provisioning” has been suggested in order to encourage banks to build up their reservations or take insurance out against having to seek further funding injections.

The report also compares 2001’s UK customer lending and customer debts (which were about equal) to the first half of 2008, where the surplus of lending over deposits (“the customer funding gap”) was £700 billion.

In its suggestions, the report has advised banks to strengthen their finances by increasing customer deposits, holding more assets that they should find easy to sell and try to reduce their reliance on the wholesale money markets.

The US Federal Reserve is scheduled to begin a two-day long meeting on Tuesday in order to decide whether or not to reduce interest rates again. It is expected that they will reduce interest rated to 1%, which would put them at their lowest level since 2001.

Analysts also believe that if this course of action is taken, this will lead to further interest rate cuts in European banks.