Bank of England to throw George Osborne a £35bn debt lifeline

Nov 9, 2012

Treasury will be handed back the interest the government has been paying on its own debt

THE Bank of England will hand over to the Treasury £35bn by March 2013, potentially allowing Chancellor George Osborne to meet his much-vaunted second fiscal rule: that government debt as a proportion of GDP would start falling by 2015-16.

The move, which was announced by the Treasury today, will mean the interest that the government pays out on the £375 billion of gilts that the Bank of England purchased as part of its quantitative easing programme will be returned to the Treasury.

The interest, which currently sits in a dedicated account called the Asset Purchase Facility at the Bank, will not be used for any additional public spending, but will be used instead to pay down the public debt.

Markets were surprised by the deal but generally bullish: Jamie Searle, a Citi strategist, told The Times: "It is clearly very positive, it sounds like the Bank of England are basically viewing this as more QE."

Vicky Redwood of Capital Economics agreed, saying: "Presentationally, it will make the debt position look better", meaning that it might save face for the Chancellor when he comes to present his Autumn Statement on 5 December.

However, TUC economist Duncan Weldon described the move as "an incredible way to maintain credibility". Weldon says that the move will have "significant political impacts" as the Government will have hit a short-term target but may risk long-term prosperity.

Less government borrowing now, when interest rates are at a historical low, will instead see money potentially paid out to holders of gilts in the future, he explained.

"Presuming that the economy gradually recovers, interest rates should rise in the years ahead," Weldon notes. "By issuing fewer gilts now and more later the Treasury will have to pay higher interest costs.”

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