George Osborne has decided to grab about £35bn of surpluses being built up under the Bank of England’s money-printing operations, making it easier for the chancellor to meet his rules on public finances.
Labour accused Mr Osborne of using “smoke and mirrors” less than a month before the autumn statement, where the chancellor will be forced to admit the economy and public finances are in a dire state.
By the end of March 2013, the Treasury estimated £35bn would be available to reduce measured debt and borrowing. It plans to transfer £11bn, or 0.7 per cent of national income, into the government’s accounts this financial year with the remainder in future years.
Aides to the chancellor insist the operation is designed to improve the efficiency of government cash management, bringing Britain into line with countries such as the US and Japan. “We are being totally transparent about this,” said one aide.
Mr Osborne’s team say it will not make the difference between passing and failing the government’s target of cutting national debt as a share of gross domestic product by 2015-16 – a target which many economists predict will be missed.
The chancellor has already seen the confidential forecasts by the independent Office for Budget Responsibility on which his autumn statement is based.
But Treasury officials admitted the move would improve the government’s position on public-sector net borrowing and public-sector net debt, thereby flattering the official targets for the public finances.
The BoE created £375bn under its so-called quantitative easing programme in a bid to stimulate the flagging economy. It injected the money it into the economy by purchasing government debt paying an average coupon of 2.9 per cent.
Subtracting the 0.5 per cent interest that the BoE must pay out on cash deposits, it profits from a 2.4 per cent “carry trade” and builds up its surpluses.
Rachel Reeves, shadow Treasury chief secretary, said: “Instead of changing course and taking action to create the jobs and growth we need to get the deficit down the chancellor seems to think he can just be bailed out in the short term by money from the Bank of England.”
The Treasury said in a statement: “Holding large amounts of cash in the [BoE’s] asset purchase facility is economically inefficient as it requires the government to borrow money to fund these coupon payments.”
But asked whether the chancellor would change his fiscal targets to offset any improvement the move appeared to offer against the fiscal rules, a Treasury official said the government would keep the targets the same while the measured deficits and debt would change.
Both the BoE and Treasury said the move made little difference to the real economy as it involved transferring money from one pot of the public sector to another although in a letter to the chancellor Sir Mervyn King, BoE governor, said the policy represented an “easing of monetary conditions”.
The independent Office for Budget Responsibility was less impressed with the reasoning offered by the Treasury.
In a comment released shortly after the policy was announced, it poured cold water on the idea that the move was an obvious improvement in the efficiency of cash management.
“If government borrowing costs rise over time as the economy recovers, or for other reasons, then debt interest payments will be higher in the future,” the OBR said.