Lower interest charges help the government accounts

The biggest change to the government’s financial position announced in the Autumn Statement was the good news that the OBR now expects much lower debt interest payments in the years ahead.
They lowered their forecast of likely debt interest from £52.1bn this year to just £35.9bn, a reduction of £16.2bn. Next year falls from £59.1bn to £40.4bn. By 2018-19 the decline is from £75.2bn to £57.5bn, a fall of £17.7bn. These falls occur despite including the debt interest on the borrowings of Network Rail into the official government figures for the first time, which increases interest payments by £2.2bn in 2018-19.
So how have these reductions come about? The forecast interest the government will have to pay has been reduced as government bond yields have stayed lower for longer enabling the government to borrow more cheaply. Inflation has fallen further and faster, cutting the cost of the indexed gilts which the government has to service. The government has also recognised that it is paying some of the interest to itself through the bonds owned through the Asset Purchase Programme. It now assumes it will continue to own those bonds and receive the interest on them. The new idea is that the APF bonds will only start to run off through redemptions once interest rates start to rise.
This amounts to good news for taxpayers, as the costs of borrowing too much in the past have just got a lot cheaper. However, taxpayers need to remember that what goes down can also go up again. Now the state has so much borrowing, rising interest rates and rising inflation rates could prove very expensive. Labour’s idea that it need not balance the budget anytime soon but could carry on borrowing more to finance its capital spending carries a substantial risk. If they won the election and embarked on spending more than the current plans, markets might make them pay more for their debts. With the present huge levels of borrowing that could prove to be very expensive.
Government and forecasters come to accept very low interest rates and expect them to remain low. They will only do so if the government is prudent with its future spending and borrowing, and if inflation stays low. I understand savers want higher rates, but they want higher real rates. Higher interest rates because inflation has taken off might help no-one and would leave a future government in great financial difficulties. At current levels of debt interest rates at pre crisis levels would mean many cuts in other programmes to try to keep the deficit under control. Labour’s spending plans do not recognise the reality of a highly indebted country.


  1. Gary
    December 13, 2014

    translation: we are in a deflationary spiral.

    the cost(servicing) of debt goes down, the burden(liquidation cost) of debt goes up.

    the value of already financed capital is eroded as its liquidation cost rises. Businesses suffer.

    tax receipts are going to fall as growth in the private sector stalls, no matter how much new debt the govt issues. Keynes called it “pushing on a string”. That is the nature of deflation.

    Only politicians can spin this as good news.

    1. Lifelogic
      December 13, 2014

      Politicians love pushing on a string. They think they can make people earn more by putting up the minimum wage. They think they can make the genders identical by passing moronic laws equality laws, they think they can create green jobs by taking money off the productive and wasting it on uneconomic nonsense. They think passing laws to control rents will create more housing. They even think they can make the elderly work efficiently until they drop by passing mad no retirement laws.

      1. Lifelogic
        December 13, 2014

        They even passed a gender law on insurance and pensions. Thinking they can pretend the genders are similar driving and death & annuity risk. They are clearly completely bonkers and think they are Gods.

    2. Denis Cooper
      December 13, 2014

      Where is your evidence that “we are in a deflationary spiral”?

      That was exactly the pretext being used nearly five years ago to justify printing vast sums of new money so the Labour government could avoid running out of cash to pay its bills and having to make drastic public spending cuts in the year leading up to the 2010 general election, but according to the last Bank of England study of which I am aware it actually had the effect of pushing consumer price inflation well above the Chancellor’s 2% pa CPI target.

      Four whole years of the annual CPI rate of inflation coming in above the 2% pa target, month after month from December 2009 to December 2013:


      Nearly 8% extra added to CPI by £375 billion of QE, just by extrapolating the Bank of England’s estimate for the inflationary effect of the first £200 billion:


      “Asset purchases equivalent to 1pc of GDP generated a corresponding 0.3pc rise in consumer prices inflation, they said. This means the Bank’s first round of asset purchases pushed inflation up by 4.2pc, which is almost triple the Bank’s 2011 estimate.”

      4.2% divided by 200 and multiplied by 375 = 7.9%.

      1. petermartin2001
        December 13, 2014


        I think you’re right that the term “deflationary spiral” doesn’t apply to the UK economy at the present time. But, it does apply to the Eurozone as a whole. It’s an economic basket case.

        That’s not to say that the UK economy doesn’t have problem of lower than necessary aggregate demand, but I would argue that this is largely because the EZ is in such bad shape that it is adversely affecting our economy too. Many countries in the EZ are doing so poorly that they simply cannot afford to buy our exports. Germany too needs to learn the lesson that it can’t sell to customers who are skint!

        Whereas with the rest of the world the UK trade position is much better. Quite healthy even.

        Now, is that because the economists and politicans of Eurozone have a similar attitude to money as yourself, whereas the politicians and economists in the rest of the world, particularly the USA, have adopted a more pragmatic approach? I’d say it was but I know you won’t agree! But leaving all theory aside that is what we undoubtedly observe.

        1. Denis Cooper
          December 15, 2014

          Unlike the Bank of England the European Central Bank sets it own inflation target, and I thought from the start that they were going a bit over the top with a CPI target of “below, but close to, 2%”.

          Likewise I thought that Norman Lamont was being foolish when he jubilantly proclaimed that we were heading for zero inflation.

          Inflation is undoubtedly a bad thing, but the problem is that the available tools do not permit sufficiently precise control to be sure that aiming for a very low or zero target won’t result in overshoot into deflation and mass unemployment, and then it can be very difficult to get out of that trap which is even worse.

          However the main problem with the eurozone is not that the ECB has been excessively strict over inflation, that merely compounds the central problem that there are few other countries in Europe which could satisfactorily share a currency with Germany but a raft of entirely unsuitable countries have been admitted.

          1. petermartin2001
            December 15, 2014

            I’d agree that it is very difficult for countries of different economic strengths to share the same currency. That’s the conventional wisdom for the Euro problem and it is not without justification.

            But, what if the Euro were only used by countries of the same or similar economic strength? Say it was only used by Sweden, Austria, the Netherlands, and Germany?

            All these countries ran export surpluses before the introduction of the Euro. Despite what the Germans say about independence of central banks, the German government instructed the Bundesbank to keep their currency (the former DM) low to maintain export competitiveness. Left alone, its value would have risen and German exports and imports would have naturally balanced. The same method is used by all exporting countries.

            Now that all these countries are in the Euro they can’t manipulate their currencies any longer. They, the exporters, need the “weaker” countries, ie the net importers, to be part of the Euro to lower its value on the exchange markets.

            And it clearly doesn’t work for the these countries. But if the exporters were solely on their own and the Euro rules, as they do, prevented the manipulation of the currency then it would not work for them either.

    3. zorro
      December 13, 2014

      I seem to recall that there was a politician called John Redwood who was calling for higher interest rates not so long ago….. Please correct me if I am wrong! Unless of course, this is just a general observation, and by no means a personal endorsement of current economic policy…..


      Reply Quite right and nothing contradictory in my view then and the latest figures now based on the policy followed.

      1. zorro
        December 14, 2014

        Reply to reply – Does that mean that you know think that effective ZIRP is the right policy?…… Whereas six months ago (http://johnredwoodsdiary.com/2014/05/24/time-to-put-up-interest-rates/) you stated that interest rates should be higher. If that policy had been implemented then, would it still be right now or would it have been wrong then and now?


        Reply I thought it right then. I would not be lowering them again today, but nor would I raise them at this juncture given what has now happened.

        1. zorro
          December 14, 2014

          Or six months before that, you thought that that maybe they should be higher (http://johnredwoodsdiary.com/2014/01/24/higher-interest-rates/), but the bank wouldn’t put them up because it did not want to threaten economic growth….. and you are returning to that train if thought?


          Reply I would have done it then. I would not do it now with the oil price collapse and the further weakness of the Eurozone.

          1. zorro
            December 14, 2014

            It would have been interesting to see what effect higher interest rates would have had on the economy if put in place then.

            I do wonder when they will have the courage to do so. I think that the longer ZIRP is in place, the more difficult it will be in (political) practice. This is uncharted territory, and is totally out of kilter with normal economic theory/practice.

            In my opinion, the only real reason for ZIRP is the interest cost of government debt. Until debt is dealt with, and I don’t mean paying it off, this problem will keep growing….


            Reply Remember my packages of measures was higher rates, lower public spending and mended commercial banks.

      2. petermartin2001
        December 15, 2014


        I’d have to agree with John Redwood. Interest rates should have been higher in previous years to prevent an accumulation of excessive debt in the economy.
        But, if interest rates are increased now, once the private sector sector debt has already accumulated, then a deep recession will invariably result.
        It could be that holding interest rates low will merely delay the inevitable. We’ll see.
        However, if interest rates had been higher, and the creation of private bank credit been lower, then the spending which has occurred in the economy and which has led to a partial recovery wouldn’t have happened either.
        So, governments do have to remember that they have another economic control lever in the form of fiscal policy. They could have taxed less and spent slightly more. Ok the deficit may have been slightly higher but at least we wouldn’t be faced with the next crash. If that happens, then tax receipts will collapse and the deficit will worsen any way. All by itself.

        1. zorro
          December 15, 2014

          Thanks for that Peter. I was actually just questioning John to test his thinking with regards to his previous statements and their relevance compared to the economic picture.

          As John is aware from previous contributions, I agree with what he puts in his last answer. We could have had more normalised rates if we had sorted out the banks quicker and controlled public spending more radically, and of course taxed a bit less.

          It is just a very different economic set of circumstances. I believe that there is no correlation (currently) between interest rates and the economy, and that ZIRP will continue for a long time because of the continuing indebtedness of governments.

          I also think that these governments are QE addicts and we may still see a return to it sooner than we think….


  2. Richard1
    December 13, 2014

    Labour’s spending plans are incoherent drivel. They want an out from deficit reduction so they can spend on ‘capital’ items. What might those be? No doubt the definition will be fudged whoever convenient, just as Gordon Brown always referred to ‘ investment’ not spending. Miliband also says they will get rid of the deficit and even on one occasion that he will reduce the national debt! Does he just have no idea what he’s talking about? Unless the whole budget is in surplus there will be no reduction in debt. As long as there is any defecit there will be borrowing. What stuffed the UK during Labour’s great recession was that we went into it with a 5% structural deficit and very highly leveraged banks. Labour can’t escape it. Their policies caused the bust and recession. They continue to be in denial and promise only more tax borrow and spend. It will surely end the same as it did last time, voters should give it a big raspberry.

  3. Mark B
    December 13, 2014

    Good morning.

    Why do we need the OBR to tell us something that the Treasury or the Bank of England could very easily do ? If you have run out of matches, I could always lend you mine.

    Government’s, especially new ones, do not lower taxes. They only lower taxes and duties ahead on an election. So I welcome a Labour government. The sooner we face reality, the better we be for it.

    1. Lifelogic
      December 13, 2014

      They do not even usually lower them before the election they just say they will do after the election like Osborne’s flight duty and the IHT thresholds that he ratted on.

    2. stred
      December 13, 2014

      The latest Private Eye reports that the top officials at the Treasury and OBR are married. She may have asked him to tell us when he offered to do the hoovering.

      1. stred
        December 13, 2014

        That may have to be altered to Hoovering in order to avoid corporate lawyers, or is it the other way around?

  4. Antisthenes
    December 13, 2014

    History tells us that if Labour win the next election interest rates will rise as it appears they have always done so in the past. The markets know that the left are economic incompetents and therefore are obliged because of the greater risk of default (remember the IMF bailout) or at least out of control spending to factor that in to the price. Coupled with their policy of high taxes and spending then a Labour win will undoubtedly see considerable social and economic dislocation that the Conservatives will once more be obliged to try and clean up once they are back in government. Regrettably the great British public never give the right enough time to do the clean up job properly as they vote for high spending(if not for high taxes but fail to understand that the two are synonymous) that hence the constant return of Labour to government to cause more havoc.

    1. Lifelogic
      December 13, 2014

      The market should is surely already expecting a labour victory Labour majority circa a 42% chance and Conservative (thank to lefty, pro EU ratter Cameron) only 8%.

    2. Denis Cooper
      December 13, 2014

      Actually history told us the same about Tory governments, somewhere I have an old newspaper cutting with a chart showing how interest rates had gone down before each general election and risen afterwards.

  5. Lifelogic
    December 13, 2014

    Labour (and indeed Conservative) spending plans rarely do recognise reality. They prefer the pretence of the magic money tree and refer to pissing money down the drain as “investment for the future” and “creating jobs”.

    10 year rates 1.8% and 30 year rising to 2.54% and yet still the government owned banks try to rob businesses and individuals off at 30%+. It surprises me that anyone wants to lend to the UK at negative real interest rates, especially given that Cameron and his wet conservatives seem so determined to throw another election perhaps with a messy. and probably incompetent hung parliament.

    If only the government knew what a good investment perhaps they should borrow and make some. Some roads, a Heathwick hub airport, new nuclear power, fracking, some better schools & new Grammar schools. A very good investment would be to pay off the half of the state sector bureaucrats who do nothing useful or worse. Start with the motorist mugging cars perhaps. Also get rid of all the countless people defending the NHS from claims and make all patients sign a limiting compensation agreement and take private insurance if they wish to. Simply the tax system and lower taxes do everything to get rid of non jobs both in the state sector and private sector. Tax lawyers & accountants, HR experts and the likes.

    Seeing patients within 3 hours (or often not) is hardly a demanding target for accident and emergency – not meeting it is pathetic and negligent. What part of “emergency” do they not understand. Of course it does not help that GPs are paid in such a way as to make it in their interest to deter patients in any way they can.

    Clearly the solution is to charge. It is clear that the many drunks and drug addict who end up there each night have sufficient money to pay something. Then they might perhaps have less for their next week/days indulgences.

  6. Lifelogic
    December 13, 2014

    Get these lower interest rates through to sound, real and productive private sector businesses. This is what is needed, and then simplify the daft employment and HR laws, high taxes and litigation culture that so deters employers from bothering to expand.

  7. Lifelogic
    December 13, 2014

    An air traffic control system that did not keep failing (or failed to a working independent back up system) might be a good investment too why is that so hard to arrange with very cheap & modern electronics?

    This so that tens of thousands were not hugely inconvenienced and millions of pounds of airlines and passengers money and their time was not wasted so pointlessly.

    1. zorro
      December 13, 2014

      This replicated through all the public sector – antiquated IT systems which are unfit for purpose. Large IT contracts with the ‘usual suspects’ companies which charge the earth and deliver little of real value. Spurious, over the top ‘security’ requirements which inflate costs and prevent productivity gains…..


  8. alan jutson
    December 13, 2014


    Additional borrowing would be madness.

    How come all of a sudden other debts/borrowing (Network Rail) have been added and included this time.

    What else has not been included ?

    Do we now have accurate figures which include all liabilities ?.

    1. Sandra Cox
      December 13, 2014

      Has the €38 billion that Juncker is after from UK taxpayers – for the EU slush fund to relaunch the European economy- been factored in?

      I understand it’s supposed to be a “loan”, but we have to face it – it’s just another tranche of our children’s and grandchildren’s hard earned cash, thrown into the bottomless money pit, otherwise known as the EU Project!

      I’ve seen John’s posting policy, but thought he might like this from a recent DT, Peter Oborne re the Euro:

      “It elegantly explains why European Monetary Union was destined to fail. The state socialists and former communists who invented the euro never got to grips with this aspect of Marxist thought. Only Conservatives with an intelligent appreciation of economics and history – an enlightened congregation that included Margaret Thatcher, Oliver Letwin, Peter Lilley, Tim Congdon, John Redwood, Nicholas Ridley and Alan Walters – grasped that the EMU would collapse under the weight of its own contradictions, and that it was folly to construct a single currency before the political conditions were in place.

      Meanwhile the European elite who advocated the euro (British representatives included Michael Heseltine, Peter Mandelson, Tony Blair, Ken Clarke, Nick Clegg and Danny Alexander, at the time only a cadet member of the European political class, so perhaps the chief secretary can be forgiven) ignored all warnings. Indeed, Lord Mandelson is still advocating British membership!”

      Why are Cameron and Osborne still taking advice from (some or all of?) these people??!

    2. acorn
      December 13, 2014

      The good old EU has changed the accounting rules to ESA 10. This forces the inclusion of the likes of Network Rail as a government indebted entity and reduces the UK government’s “off balance sheet” accounting tricks. Public sector net debt “ex” (PSNDex), now only allows the exclusion of publicly owned banks.

      Also, as JR said above, the new rules require any interest a Treasury pays to itself via its own central bank is to be deducted. ESA10, the same as the UK and US versions of “Whole Government Accounts”, consolidate the Treasury and the Central Bank as one and the same. That is, all transactions between them net to zero. Basically, governments’ accounting is becoming similar to the “consolidated group accounts” of a large multinational. And so it should IMO.

      Likewise, the Bank of England swapping “reserves” for Gilts under QE, leaves the Treasury/BoE, buying back its own interest paying Bonds and replacing it with the original “reserves” the Treasury spent into existence originally. Hence, when the BoE buys them in, it is the same as if the Treasury (DMO) had never issued them in the first instance.

  9. JoeSoap
    December 13, 2014

    Why not imagine a Conservative world where debt hadn’t spiralled dramatically in the past 5 years?
    Where income tax rates could be reduced by now because the right cuts had been made in 2010 instead of continuing to pay every benefit imaginable?
    Where housing benefit reductions made in 2010 had led to house price stability in the capital?
    Where encouraging mobility northwards to fill empty cheap houses and create employment had evened out prosperity in the north versus the south?
    Where Daniel Hannan’s plans yesterday had been enacted along with an in-out referendum in this Parliament?
    Where most of that 20% UKIP vote would now be Conservative and you would be romping home to victory next year instead of handing over to an even more incompetent administration?
    Where the installation of £3 million wind turbines weren’t causing NOx emissions from traffic jams when the oil price was dropping like a stone?

    Sadly we are in la la land instead, with all sorts of unintended consequences from the daft decisions of the past 5 years. Near to zero interest rates, for better or worse, is just one example.

    1. Denis Cooper
      December 13, 2014

      Even if UKIP were to completely disappear from the political scene it would be more like a maximum 2% net benefit to the Tories vis-à-vis Labour, not 20%; which would be nowhere near enough for them to romp home, given that they got 7% more votes last time but that was not enough to get an overall majority.

      1. JoeSoap
        December 13, 2014

        A different leadership could change all that.

  10. waramess
    December 13, 2014

    There is a cost. No such thing as a free lunch, they say.

    Savers continue to receive a lower intereest rate than they would if interest rates were at a normal level consistent with the supply and demand for credit and, the ordinary wage earner, who is receiving a wage that is being constantly devalued by an inflation rate that is higher than wage increases is also a big loser.

    All this in the name of benefits to the Government.

    Higher taxes on cigarettes, for example, would be of benefit to the Government as would higher taxes on alcohol, but lower government spending would be better for the ordinary man in the street and, the lower interest charges do not actually reflect real lower spending.

    Five months before an election with all the promises of what would be done but no hard evidence that anything meaningful has been done over the past four years will leave politicians clutching at straws.

    Personally I do not think the electorate are stupid enough to fall for this but I suspect the politicians are stupid enough to believe they will.

    1. behindthefrogs
      December 14, 2014

      Higher taxes on alcohol aren’t needed. The simple move of introducing minimum pricing combined with tighter rules on those selling alcohol would produce a higher yield would suffice.
      This would either reduce police and A&E costs short term, and NHS costs long term or raise a lot of extra revenue through the extra VAT collected.
      The tighter rules on those selling alcohol should include bigger penalties for those selling smuggled alcohol and to children. In addition we need off licences in town and city centres to close early in the evening, sales in supermarkets to be moved to a dedicated counter preferably with its own entrance, and sales to stopped completely in garages and similar outlets. We need to make the purchase of alcohol a conscious decision and not something that is just picked up with the food shopping or a petrol purchase.

  11. ian wragg
    December 13, 2014

    Mickey Mouse accounting. Why don’t you get the BoE to reduce rates to negative and then you can rack up even more debt.
    With a possibility of deflation, debt as a proportion of GDP will increase and when interest rates return to normal you will have bankrupted us.
    The fact that these figures are suspicious doesn’t alter the fact that debt repayment of circa £60 billion in 2018/19 is disgraceful.
    Especially when you continue to hose borrowed cash at international aid.
    You are a disgrace.

  12. Bert Young
    December 13, 2014

    Good news indeed . I cringe at the thought that Labour would re-introduce unpopular taxes and recommence a programme of ill-thought out give-aways were they to be in power once again . Reducing the debt and the deficit has to be achieved and this can only be done if there is a firm hand holding the treasury tiller .

    The other shocking reality is the level of personal debt . Consumers have contributed to the rejuvenation of our economic state of affairs but only at the expense of an ever bigger credit card debt mountain . How this state is brought back to reality is a very tricky matter ; individuals seem to have the view that whatever they want they can have – tomorrow doesn’t seem to matter . Add to this state is the high cost of property giving the young an almost impossible barrier to overcome to get on the ladder .

    Whoever gets the job of running the country and its economy must do so with both national and personal debt in mind . It will take more than a gastric belt to achieve a healthy figure and body ; we have to address the whole question of diet starting at rigid parental control and re-educating the entire population .

  13. Bill
    December 13, 2014

    Thank you. Agree with your last statement that Labour does not recognise the reality of a highly indebted country. Borrowing is a cost and the greater the borrowing the greater the cost. Who has to service the debt? The taxpayer, either in this generation or the next. Some borrowing, of course, buys assets but, even so, the value of the asset must exceed the cost of the borrowing.

    We had to borrow to service the cost of the Great War and the same applied with the Second World War. Tax rates rose after 1918 and after 1945 and, though in the latter case, something had been learnt from J M Keynes, Keynes’s own theories are somewhat flexible and it is arguable that his attack on the reparations Germany had to pay was misplaced.

    The debts of the present era do not arise from the necessity of war but from the incompetence of the Labour administration under Gordon Brown and his two assistants Ed Miliband and Ed Balls. It is no good blaming the world economy for their incompetence since the USA has recovered more rapidly than the UK.

  14. Lifelogic
    December 13, 2014

    Interest rates will only stay low “if the government is prudent”. What is the chance of that given that Miliband (the voice of the state sector unions) look very likely not that Cameron/Osborne or some dreadful rainbow coalition are likely to be very prudent either. They are all high tax, borrow and piss down the drain merchants to their very cores. Plus merchants of over regulation, ever more EU and endless “equality” drivel and more expensive energy green crap too.

  15. Aatif Ahmad
    December 13, 2014

    Is Help To Buy the appropriate medicine for a highly indebted country? I thought inflation was the way to bring down total debt levels, in the absence of a global recovery?

    1. Lifelogic
      December 13, 2014

      We have “help to buy” and then an absurd huge up to 12% stamp duty as a hindrance to buy or sell. Perhaps they could decide which they want?

      1. behindthefrogs
        December 13, 2014

        You seem not to have noticed that the 12% rate of stamp duty only applies to very high value properties for which help to buy is irrelevant.

        What is more worrying is the stamp duty proposals reduce the tax take by nearly £1bn and in doing so increase the deficit by a further 1%. Surely the stamp duty boundaries particularly at the higher levels could have been set so that the changes were tax neutral.

  16. stred
    December 13, 2014

    QE seems to be working well for everyone receiving government money- Civil servants, CBI members building white elephants, councillors, MPs, GPs, quangos, publicly owned private companies, PFIs, bankers, accountants, vice chancellors, claims lawyers, green energy crap merchants, borrowers- only people who have saved and or private pensioners are stuffed. They will be falling off their perch soon, so why should politicians worry.

    By the way, the HMRC advise that political parties have to have at least two MPs elected in order to receive tax exemptions to avoid Inheritance Tax. Revenge is now possible for those who do not like their children or wives.

  17. Ralph Musgrave
    December 13, 2014

    Government could easily reduce borrowing costs to NOTHING at all by the simple expedient of QEing the entire national debt. As to any inflationary effect of that (and the inflationary effect of QE so far seems to be muted), that can be dealt with by raised taxes. GDP would remain unaltered as long as the above inflationary effect equaled the deflationary effect of the increased taxes.

    Indeed, Milton Friedman advocated that governments should borrow nothing.

    1. Denis Cooper
      December 13, 2014

      1. As practised in the UK the simple expedient of QE means that the government is indirectly borrowing from the Bank of England rather than from its normal lenders, and while that borrowing is effectively interest free the capital sums will still have to be repaid or the Bank will go bust.

      2. If the Bank, or more accurately its wholly owned subsidiary, bought up all the existing gilts that would create a few problems for pensioners who depend upon interest payments on gilts for their income.

      3. According to the latest Bank of England study of which I’m aware the effect of £375 billion of QE was to add about 8% to CPI, resulting in inflation running above the Chancellor’s 2% pa target for four whole years, which you seem to have forgotten about when you write that its inflationary effect was “muted”. So on a simple pro rata basis buying up all the rest of the gilts, currently valued at about £990 billion, would add about 21% to CPI, which I think would easily take it into a region where it became self-reinforcing with the old wages-prices spiral.

      4. I’ve never read a word of the works of Milton Friedman, but somehow I doubt that he ever advocated that profligate politicians should be allowed to arrange for the creation of as much new money as they wanted to spend.

      1. Ralph Musgrave
        December 14, 2014

        1. The central bank of a country that issues its own currency cannot “go bust”: it is free to print any amount of money it wants. That may cause excess inflation, but there’s no good reason for a CB to go bust.

        Re the idea that national debt has to be “repaid”, the plain fact is that it just isn’t. It never has been. I.e. the debt (in terms of pounds / dollars) has risen steadily year after year, apart from the occasional surplus year, since WWII and before.

        2. Re pensioners, anyone who puts their entire pension nest egg into government debt needs their head examining: inflation eats away at the capital sum, which wipes out the interest. I.e. the interest or income from that investment is an illusion. Plus far and away the biggest pension scheme, state pensions, does not rely on government debt or any other investment: it’s “pay as you go”.

        3. Re inflation, that’s now below the 2% target, thus I’m sticking to my claim that the inflationary effects of QE are minor.

        4. Clearly politicians mustn’t be allowed unrestricted access to the printing press, and Friedman didn’t actually go into details on how to keep them away from the printing press.
        Basically their system simply consists of some sort of CB committee, like the MPC, determining the amount of money to create, while strictly political decisions are left in the hands of politicians. And that’s not actually much different to the EXISTING system.

        1. Denis Cooper
          December 16, 2014

          1. How else would you describe a bank with negative net assets, than as “bust”? When the Bank of England was a privately owned bank I don’t think there was any question that in theory it could go bust, like any other private bank, and it makes no difference that all of its shares are now owned by the Treasury. There is no salvation in being able to issue more money if nobody wants to accept it in payment any more, including of course other central banks around the world; but it seems that some people are intent on testing the system to destruction.

          2. On the contrary, there are company pension schemes which are no longer open to new contributing members and which are more or less entirely invested in gilts, precisely because it is the best and safest pay to ensure that the pensions can be paid.

          3. The annual rate of inflation has temporarily dropped for various reasons, but that says nothing whatsoever about the past effects of QE on inflation which were far from “muted”.

          4. I’m pretty sure that if Friedman thought that governments should not even borrow existing money to fund their spending he would have been horrified at the idea that governments should print new money to fund their spending.

          Reply The Bank of England owes sums which in extremis it could simply print, or issue bonds to cover them which people would buy. I cannot see how the B of E can go bust. Of course a future government could so debase the money that to meet the obligations they would need to print a lot, and erode the value of the repayments by inflation.

          1. Denis Cooper
            December 16, 2014

            I ask again: “How else would you describe a bank with negative net assets, than as “bust”?”

            The Bank created £375 billion of new money which is out there in the hands of others and which cannot simply be cancelled at the behest of the Bank or the Treasury or even Parliament in any feasible or ethical way – would you be happy to suffer an arbitrary cancellation of a certain proportion of the money in your bank and building society accounts? – but which is at present balanced by the gilts that are owned by its wholly owned subsidiary; if those gilts were cancelled, both the subsidiary and the Bank would have net negative assets, in normal terminology they would be “bust”, and there would be no device to avoid that.

            Reply Not so. If I lend myself £1,000 I could at any time cancel the loan and repay myself!

          2. Denis Cooper
            December 17, 2014

            Creditors can unilaterally decide to cancel loans that they have made, but debtors cannot unilaterally decide to cancel loans they have taken out. The Bank of England is a creditor for the loans it made to its wholly owned subsidiary to fund the purchases of the gilts, but it is a debtor with respect to the £375 billion of new money put into circulation. That is why the first appears on the assets side of its balance sheet while the second appears on the liabilities side; and while in theory the Bank could agree to the cancellation of the first, its assets, there is no way for it unilaterally to cancel the second, its liabilities. As I said, would you be happy if it was announced that the £375 billion was being cancelled, and your share of that would simply be struck off the balances of your bank and building society accounts?

            Reply Of course not. The government can repay the gilt to itself, thereby cancelling both sides of the public sector transaction.

  18. Kenneth R Moore
    December 13, 2014

    I had to check again this was John Redwood’s website and not Conservatives.com. Please spare us a run of spun good news Conservative stories up to the next election.

    Well thanks for the tiny crumb of comfort John.
    Your government continues to spray it’s vested interests with mountains of borrowed cash as hundreds of councillors, quango bosses and NHS managers continue to be paid more than the prime minister.
    Really you should resign immediately on principle and state that you do not want this to continue anymore. Then you might be able to tell it like it is and have something more interesting to say. This coalition could never be described as being ‘prudent’ ..not by the wildest stretch of the imagination.

    Why could we manage in 1998 with public spending at half of what it is today – I don’t seem to remember that earlier time being demonstrably worse than the mess we are in today ?.

  19. Denis Cooper
    December 13, 2014

    “The government has also recognised that it is paying some of the interest to itself through the bonds owned through the Asset Purchase Programme. It now assumes it will continue to own those bonds and receive the interest on them. The new idea is that the APF bonds will only start to run off through redemptions once interest rates start to rise.”

    I would suggest this rather longer, but more accurate, corrected version:

    “The government has also recognised that it is paying some of the interest to the Bank of England Asset Purchase Facility Fund Limited or BEAPFF, the wholly owned subsidiary of the Bank of England which owns the £375 billion of bonds purchased using newly created money through the two programmes of Quantitative Easing, and as the Bank itself is wholly owned by the Treasury that interest can potentially be recycled to the Treasury as part of the Bank’s profits. It now assumes that the BEAPFF will continue to own those bonds and so receive the interest and eventually the capital repayments on them, so enabling it to pay off the loans from the Bank which funded the purchases of previously issued gilts from private gilts investors while at the same time the Treasury continued to sell new gilts to much the same set of investors at much the same rate. The idea now is that the BEAPFF will not attempt to sell any of those gilts back to private investors, as dumping any significant portion of £375 billion of surplus gilts back into the market would push up interest rates, but instead will hold them to redemption. Nor will it be proposed that the gilts should simply be cancelled, because if that was done on any scale it would lead to both the BEAPFF and the Bank going bust.”

    Hope that helps!

  20. formula57
    December 13, 2014

    And who thinks that “The new idea is that the APF bonds will only start to run off through redemptions once interest rates start to rise” is but a staging point in the thinking on the way to eventual cancellation and debasement of the coinage?

    1. Mitchel
      December 13, 2014

      I certainly do.I see no possibility of moving ito surplus and therefore reducing government debt in an acceptable way;there simply isn’t the political will to do it.I believe we will therefore have a sterling crisis during the course of the next parliament.

      I’ve never been a “goldbug” historically,but taking advantage of the relative strength of Sterling earlier this year and the weakness of gold during the summer,I’ve moved a substantial part of my long term capital from the former to the latter. I think the risks to Sterling deposits are simply too high looking ahead.

    2. Mark
      December 14, 2014

      The present portfolio of QE gilts was acquired at roughly a £50bn premium to par redemption value. That means that the same sum must be set aside from coupon income to cover the capital losses from holding gilts to redemption.

      The present policy is to roll over gilts that redeem, by acquiring extra gilts to the value of the original purchase (above par), gradually crystallising the coupon income required to pay for losses. However, where replacement gilts are also acquired above par, the loss reserve is increased. When interest rates rise, the premium to par reduces for roll-over acquisitions, and indeed for low coupon gilts, may even move to a discount to par.

      Coupon income to redemption will always be sufficient to pay for the capital loss so long as the redemption yield is positive. However, there is a restriction on the amount of coupon income the government can take: it must cover the losses and the BoE loan at 0.5% that finances the BEAPFF purchases. Perhaps this should be formally accounted by the Treasury and the Bank (and the OBR).

  21. Eddie Hill
    December 13, 2014

    It’s the economics of madness.

    What we need is a genuinely conservative government with genuinely conservative policies, not the kind of ersatz socialism of borrow and spend that we currently have to endure.

    Major capital projects such as HS2 or a new runway at Heathrow (all of which will be delivered years later than planned and usually at 4 times the cost) should all be canned, because Keynesian economics is basically socialism.

    And how bad does our own financial position need to be before we stop giving 0.7% of our GDP to “developing” (i.e. corrupt, anarchic and/ or inefficient) countries?

    Also, what’s the point in trying to have a successful economy when the EU just sends us a bill for it to subsidise the failed socialist economies of other European countries, most of which ignore the EU’s financial prudence rules?

    I’d have thought it would be better to have a failing economy, which would have the dual benefit of repelling the invasion of econokmic migrants and getting money back from the EU, or does it not work that way round?

    1. petermartin2001
      December 13, 2014

      <em Keynesian economics is basically socialism

      Keynesian economics is a toolkit for managed capitalism. Hardline Marxists, and some at the other end of the political spectrum too, look at contemporary society and see nothing but a class struggle.

      But, there is a natural alliance between workers and capitalists too. If capitalists are making profits and offering well paid jobs then surely both groups will be happy about that. Sure, there will be disputes about wage levels and the extent to which profits should be shared between owners and workers, but it is better to have those disputes than no profits, no wages and no jobs.

      The sensible application of Keynesian economics can deliver a successful economic system. Call it what you like, but it brings profits for the capitalists and good wages for the workers.

      1. libertarian
        December 15, 2014


        Keynesian stimulations brings profits for capitalists?

        No it doesn’t you STILL don’t get it. The government TAKES money from the productive sector and hands SOME of it back in the form of “investments” , “stimulus packages” and other pork barrel projects. Keynesian stimulus is digging holes in the road and filling them in again and calling it productivity.

  22. BobE
    December 13, 2014

    I see that they are trying to undervalue the compensation for properties on the HS2 route. A lot of those people are going to vote for the only party that will scrap this vanity project.
    With labour likely to loose 20 seats to the snp in Scotland the election is going to be no overall control. The snp may well have the controlling majority with labour!!!
    CMD would have been better to have let Scotland go, it would have given him the election.

  23. Denis Cooper
    December 13, 2014

    “At current levels of debt interest rates at pre crisis levels would mean many cuts in other programmes to try to keep the deficit under control. Labour’s spending plans do not recognise the reality of a highly indebted country.”

    I think we know the solution which would be advocated because we saw it happen in 2009, and we have since seen it repeatedly advocated and justified in comments here – just create as much new money as the Labour politicians needed to satisfy their urge to spend, ostensibly for the sake of the economy but in reality more for the sake of keeping themselves in power and able to pursue their ideological aims.

    And unfortunately not only did Osborne signally fail to denounce Labour’s cunning plan during that year leading up to the 2010 general election, after just a single, and actually premature, outburst in the January, he quietly adopted the same plan himself and thus helped to legitimise it.

    1. acorn
      December 14, 2014

      Denis and JR. “Labour’s spending plans do not recognise the reality of a highly indebted country.”

      Please could you tell us how we will recognise the reality of a highly indebted country? What exactly will happen? Which metrics should we be panicking over? Exactly how will households be better off when Mr Osborne reduces the deficit to zero and consequently will not be issuing any “net new” Gilts for pension funds to buy? Will Mr Osborne close down NS&I as it is also a Gilt issuer for little people? Is the plan that we should be buying dividend paying shares, rather than interest paying Gilts?

      I think we should be told.

      Reply When Mr Brown repaid some debt in the early years by keeping on with Conservative spending plans, the economy worked very well. Doubtless if we get back to debt repayment we need to be ready to borrow again if there is a worldwide cyclical downturn or other problem.

      1. petermartin2001
        December 15, 2014

        It is true that Gordon Brown repaid some debt after posting a government surplus around the turn of the millenium. Curiously, the same thing happened under the Clinton administration in the USA and under Jean Chrétien in Canada too. So, net importing countries which don’t normally post budgetary surpluses were suddenly producing one.

        The assumption at the time was this was a triumph of prudent economic management. The alternative view is that over-lending was occurring in the private sector. We have to remember the principles of double entry book-keeping. If these governments were producing surpluses then the ‘non-government’ would have been in deficit on a penny for penny basis.

        That wouldn’t have been so bad if these non-government sectors didn’t include the central banks of Germany and China! Money was leaving these economies to pay for imports too. So, what was known as the ‘dotcom boom’ in the late 90’s turned into the ‘tech-wreck’ of the early 00’s. Another housing boom followed, to keep the wheels turning, but that lasted only until 2008.

        The generation of private credit in the economy needs to be better regulated to avoid it leading to these boom and bust cycles. It is simply not acceptable for private banks to be arm-twisting their customers to take out loans one year, but then suddenly decide that the money has run out a couple of years later to such an extent that even viable businesses are pushed to the verge of failure due to an application of a credit crunch.

        There needs to be a rule along the lines that the rate of change of credit generation cannot exceed certain parameters. In other words, if banks issue £N worth of loans in one year then they must do the same in the following year within certain limits. Say +/- 10%.

      2. Denis Cooper
        December 15, 2014

        Ultimately it’s the lenders in the bond markets who make an assessment of whether a government has become so highly indebted that they should be increasingly wary about lending it any more money which it may not be able to repay with interest as promised. Unfortunately they may rely too much on the analysis of various metrics by ratings agencies, which at one time said that the bonds issued by the Greek government were almost as safe as those issued by the German government and only began to change their minds when it was too late.

        1. acorn
          December 15, 2014

          Bond markets have no influence over sovereign floating fiat currency issuing countries. They can only play to the extent that the Central Bank for that currency will let them. They can only attack countries that use a “foreign” currency. Greece uses a foreign currency, the Euro.

          Rating Agencies issuing ratings on sovereign currency nations is a nonsense, a sovereign currency nation can’t go broke in its own currency. In 2011 they downgraded the US Dollar, which had no effect on anything and was totally meaningless.

          BTW. If you want to be the worlds “reserve currency”, you have to maintain a large trade deficit for decades. The rest of the world ends up with train loads of your currency in their foreign currency reserves account.

          1. Denis Cooper
            December 16, 2014

            “Bond markets have no influence over sovereign floating fiat currency issuing countries.”

            Well, that’s nonsense; if a government is running a large deficit and the bond markets turn against it then it is in serious trouble even if the country has its own currency.

          2. petermartin2001
            December 17, 2014

            Denis, You should think about these things a bit more. If countries allow their currencies to float freely, and then there is no need for governments to worry about the bond markets.

            The worst that can happen is their currencies will depreciate. That will mean their trade account will move into surplus. They’ll have a net inflow of money into their economy.

            They won’t need to sell bonds.

        2. petermartin2001
          December 16, 2014

          What you say is true for the Greek Government and all Eurozone countries. They are users of someone else’s currency and not issuers of their own currency.

          The phrase “which it may not be able to repay with interest as promised” cannot possibly be true for the UK government-unless it joins the Euro. It will never be in a position where it cannot pay any debt which is denominated in its own currency ie the £ sterling.

          It can create too much inflation if it spends too much money, either by creating new money or by borrowing back previously issued money. On the other hand, it can create deflation and recession by taxing too much and spending too little.

  24. petermartin2001
    December 13, 2014

    If they [Labour] won the election and embarked on spending more than the current plans, markets might make them pay more for their debts.

    Yes that’s the conventional wisdom. The consensus of mainstream Economic thinking. But is the mainstream correct? What is it about the mainstream of Economics that makes it different from the real sciences where I would argue that the mainstreams are indeed, by and large, correct?

    A real scientist would look at the evidence first and suggest a theory afterwards. In the case of interest rates, a real scientist would observe that recently interest rates have fallen to close to zero as government debt has risen sharply. Its not just like that in the UK , it’s the same in the USA too. There we have record levels of debt , in dollar terms, but not in GDP terms, at the same time as interest rates are very very low. It’s been the same story in the entire developed world since the 2008 crash. High public sector debt and ultra low interest rates.

    That’s not theory. That’s an observed fact. So let’s try to explain why.

    We start by with another observation. There is no longer any link between anything of tangible value, like gold and silver, and any of the world’s currencies. They are all fiat. IOUs of government and the creation of government, or the State, if you prefer. Sovereign governments like the USA, the UK, Japan etc, but not the Eurozone countries, can issue as much or as little of their own currency as they like. They can indulge in unusual measures and call it “Quantitative Easing” if they wish.

    The more they issue, generally by spending it into the economy, the more of it ends up in the banking system. Therefore the banks end up a glut of government money in their reserve accounts at the central banks. They don’t need to borrow any more as they already have too much. So, the more money there is, the less need there is for any bank to borrow any more and so interest rates naturally fall to zero, on the basis of supply and demand, if there is no government intervention.

    But governments do intervene. They may not want zero interest rates. Generally they set an overnight target rate, which can be whatever they wish it to be, and manipulate the money markets to set that rate. They issue bonds to remove excess reserves from commercial banks. They may offer interest on reserves held at central banks.

    Governments like the USA and the UK can set interest rates, in their own currencies, at whatever level they like them to be. That’s really just another observation and it is high time that the mainstream of the Economics profession stopped pretending otherwise.

    1. acorn
      December 14, 2014

      Peter, keep in mind that the BoE does pay interest on reserve accounts. As you say the overnight base rate would fall to zero otherwise. QE has created far more reserves than the interbank system needs.

      The BoE base rate, currently 0.5%, is to control the commercial bank lending rates. Those banks lend to customers they think can pay back with interest. Remember also. If they think customer risk is low they will lend more. That will use up private sector capacity and start pushing up prices, inflation. The BoE will jack up the base interest rate to slow the banks down.

      That is not the case at the moment. Banks are being allowed to make super-normal profits to rebuild balance sheets. The Treasury knows it; the BoE knows it; the government knows it. Only the voters don’t know they are paying for it.

      1. Denis Cooper
        December 15, 2014

        “QE has created far more reserves than the interbank system needs.”

        I suppose that could be because the volume of new money created, £375 billion, was not determined by the needs of the interbank system but by the perceived needs of two successive Chancellors faced with the problem of funding their budget deficits.

  25. Lindsay McDougall
    December 16, 2014

    Where has the £375 billion of QE actually gone? Where is it now and what prices has it inflated?

    1. Denis Cooper
      December 16, 2014

      Having been passed from the Bank to the Treasury through the gilts market and then spent by the government when it paid its bills, the £375 billion quickly went into a multitude of bank accounts, those of individuals and companies and other organisations, and it is still being circulated around between accounts. That is why there is no feasible or ethical way for the Bank to cancel it to balance out a premature cancellation of the gilts owned by its subsidiary, instead the money has to be gradually recovered by the government, primarily through taxation, and paid back to the Bank’s subsidiary in respect of the gilts so that the subsidiary can repay the loans from the Bank that funded the purchases of the gilts.

    2. petermartin2001
      December 16, 2014

      That’s a good question. Strictly speaking QE is the process of governments, via their supposedly independent central banks, buying back bonds and other securities from the commercial banks by creating money , from nothing.

      So, if the price is fair both government and the banks end up all square afterwards. If the banks don’t spend that money but instead just use it to pick up a small amount of interest in their reserve accounts at the BoE, in the same way their previous holdings of gilts effectively paid them a small level of interest then nothing much has changed, except that the banks have more liquidity (cash) than previously.

      Where it gets a bit more difficult to follow is when the Treasury then issue new gilts, as they do all the time, and the cash that the banks hold from the sale of their old gilts is used to buy new ones. Then the process of QE becomes effectively one of the BoE buying bonds, by proxy, from the Treasury to give the Treasury spending money. That’s considered a big no-no in “responsible” economic circles because it smacks of reckless “money printing”. So, some of that money, probably most of it, would have been spent but some still remains in the bank’s reserve accounts.

      It would all be much simpler to follow if government didn’t issue gilts but instead just paid interest to banks and other financial institutions via their reserve accounts at the BoE. We could see straightway what money was being created “from nothing”, as in fact all money/cash and gilts are. They are both just different forms of government IOU. One has interest attached. One doesn’t.

      If you Google a graph of UK inflation you can see there is, contrary to the predictions of the doomsayers, no evidence of any sharp increase due to QE. My view is that governments can do what they like with their currency providing they don’t create too much inflation on the one hand or too much recession on the other. So QE passes that test. But we all have different opinions about that!

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