Last week, George Osborne floated the idea of third high speed railway line – ‘HS3’ – to link up the cities of the north. This is awfully big thinking for a Chancellor with supposedly so little money to spend.
Writing for Prospect, Emran Mian wonders if there might be a reason for the Chancellor’s expansive mood:
“It may be that Osborne’s internal reckoners tell him that growth is stronger than the Office for Budget Responsibility (OBR) forecast at the Budget. Alongside the OBR’s central forecast there were also some alternative scenarios. The most bullish was based on growth of 3.1 per cent this year and 3.3 per cent next year. Hitting those numbers would mean that public sector net borrowing starts falling quicker and that the debt to GDP ratio is in decline by next year, one year earlier than forecast. By the end of the next Parliament it may even be below 70 per cent. That’s a big change.”
In fact, with British economy now growing at an annualised rate of four per cent (according to the Governor of the Bank of England) – the Chancellor’s room for manoeuvre is widening all the time:
“While income tax receipts are up by a much smaller amount, VAT, stamp duty and corporation tax are picking up the slack. The OBR said at Budget that there was a 20 per cent chance of hitting a current surplus in 2015-16. Those odds may have improved, which would give the Chancellor the flexibility to announce more spending while sticking to his target of achieving a surplus by 2018-19.”
Furthermore, a positive fiscal outlook allows a government to take liberties with Britain’s balance sheet. As Gordon Brown and Ed Balls could tell you, there are all sort of ways of borrowing money (or not paying it back) that don’t show up in the headline figures – for instance, through PFI deals or by encouraging consumers to max out their credit cards then raking in the consequent tax revenues. George Osborne, however, faces a very special temptation: an opportunity to pull the mother of all fiscal fast ones – by effectively cancelling one third of our entire national debt.
This is the portion of our debt that consists of bonds purchased by the Bank of England with the money created in the process of quantitative easing. The Bank owns the bonds, but the state owns the Bank – which allows for all manner of jiggery-pokery (to use the technical term):
“Lord Adair Turner recently suggested that the Bank of England could ‘seal off’ the government debt it has bought by way of quantitative easing, or a portion of it, and turn it into non-interest bearing bonds.”
This could save the Chancellor a very large amount of money:
“The government is forecast to pay almost £60bn in debt interest in 2015-16. The Bank owns about a third of the debt. So the saving on debt interest for the government from a further unconventional monetary strategy could be as high as £20bn…”
Lord Turner’s plan is better than selling the debt back into the money markets – because there’s no guarantee that investors would be interested. It’s better, too, than the Bank of England simply cancelling the debt, because that would artificially reduce Britain’s debt-to-GDP ratio, giving future governments an excuse to go on another borrowing binge.
However, there is an even better option. Instead of sealing off the debt, the bonds should be transferred from the Bank of England into a UK Sovereign Wealth Fund. The Government would go on paying interest, thereby maintaining fiscal discipline – but the money would be channeled into a long-term investment for the whole nation. The precedent established by Norway’s sovereign wealth fund, shows that with the right legal and political framework a national nest-egg can be managed without greedy governments grabbing the assets to bankroll profligate spending.
In any case, it would be good idea if Osborne sets out a clear direction – otherwise it might be a Labour Chancellor who gets to decide.