Is the Treasury trying to get itself off the hook on its fiscal targets?
There’s been much confusion about the effect of the Treasury’s decision to retain the interest payments it makes to the Bank of England’s Asset Purchase Facility (APF) – the vehicle that holds £375bn of gilts resulting from QE. All the Treasury has to do is pay the Bank of England interest in respect of the loan the latter provided to buy the assets in the first place. In effect, this is an (almost) interest free loan to the government, for a while, lowering public sector net borrowing.
But once the Bank rate starts to rise, the interest rate paid by the APF, and hence the Treasury, will also start to rise. Things won’t look so great for the Treasury at that point. Once interest rates are back to normal, public sector net borrowing will be higher than it would have been.
The big question here is does this affect the Treasury’s fiscal mandate – to eliminate the structural deficit on the current budget within five years – or the supplementary target – to have debt as a proportion of GDP falling in 2015-16?
The first reaction of some seems to be that this does help with the rules, but I’m not so sure. This idea seems to have taken hold because HM Treasury have said that the changes ‘will affect measured deficits and debt’.
On the first rule, once the Gilts are sold back into the market and QE unwound, the underlying fiscal position will be essentially unchanged. So the changes might lower the headline deficit, but it’s hard to see them having any substantial effect on the structural part of the current budget deficit. Only the latter counts for meeting the Government’s fiscal mandate.
But what of the debt rule that the Chancellor looked on course to miss? Is tinkering with debt levels gaming the second target? Not necessarily. While a £35bn windfall 2012-13 and 2013-14 is nice, it won’t have much effect on the change in public sector net borrowing between 2014-15 and 2016-17 – the thing that must fall to meet the second target. And if interest rates rise in 2015-16, there’s every chance the debt target will be harder to hit. Whether this change makes the debt rule easier or harder to hit is therefore ambiguous.
The effects of today’s changes are complicated, but they don’t look to me like the Chancellor trying to wriggle off the hook of his own fiscal targets.