It appears that George Osborne and Mervyn King have made a very nice agreement whereby the Bank of England (BoE) gives the Treasury £35 Billion of interest back or a 35 Billion gift? This money being the interest earned on State debt that was purchased by the B of E under Quantitative Easing (QE).
There are a number of different versions of this story doing the rounds and I admit that I am not sure which is the most accurate? This one by Unison Active sees this as evidence that the whole austerity programme is a deceit by the Government and George Osborne. However it also indicates that both the Federal reserve in the US and the Bank of Japan pass on any interest earned on Government debt back to the Government anyway.
If that is the case then surely we should do the same rather than borrow more money to pay the interest owed to the Bank of England. Seen this way the BoE are simply giving the Government back the interest it has paid on its QE debts – making it an interest free loan.
This article in the Business Recorder states that it is interest in one paragraph and then describes it as excess cash held by the bank in its Quantitative Easing facility? The article also states that this procedure is in line with arrangements in other countries.
Bloomberg Newsweek also carries this story and comments on the fact that it is a timely decision as it saves George Osborne from a rather difficult position whereby he was going to have to admit that he had missed a target he set to have Government debt falling in the fiscal year of 2015 – 2016.
What is interesting in this article is that this transfer of money to the Treasury is predicted to have the same effect as if it had been used to buy Government debt under quantitative easing!
“The Monetary Policy Committee views the transfer as “having an effect similar” to the central bank buying gilts through quantitative easing.”
So the Bank of England is just giving this money to the Treasury rather than using it to buy Government debt?
If that is the case then the argument in the Unison article that the “The austerity programme is a political tool to justify the decimation of the public sector and the benefits system and should be so exposed.” does seem to have some merit. I say this because it appears that the Bank can just give the Government money or it can give it an interest free loan.
In either case this begs the question as to why we need an austerity programme at this point in time when the country is struggling so much to drag itself out of recession.
My understand is that the 35 billion was there in case we needed further QE. As it’s possible that we may well be in for a triple dip recession I am left to ponder why this money is not being held to help with that possible scenario?
Instead it will be transferred to the Treasury and if this is the case what will happen if we do triple dip and the B of E has to find more money to enable more QE and if it can conjure up more money in that way then surely could just give that money to the Treasury rather than causing more Government debt and if that is the case why as the unison article asks did it not do so in the first place?
If the Bank of England is supplying an interest free loan to the Government then the debt repayments can wait until tax receipts recover. Therefore the government does not need to slash and burn everything at this point in time instead it could have kept people in employment which would have improved tax receipts until growth returned.
At that point an ideological move from public to private sector would have been much less painful as people could have naturally moved from public to private sector jobs rather than being forced into them or into unemployment through the austerity measures imposed by the Government.
That’s my understanding of this particular issue. I admit that I have always seen the austerity programme as a rather blunt and unnecessary government tool to massively reduce the public sector rather than the best way to deal with our current financial difficulties.
To me this transfer of funds does suggest that there may be some mileage in this point of view.
What do you think?
Update 12/11/2012 last night I found another post on this topic on Think Left indicating that there is nothing underhand to this except the timing perhaps in relation to Osbornes debt targets. The article also makes a similar point to that stated above about Government debt. “This latest announcement is just another reminder that much of ‘the debt’ is not really debt at all and certainly isn’t a burden on future generations.”