The Chancellor's emphasis on controlling public spending at the bottom of the economic cycle serves to highlight the borrowing problem rather than inspire confidence in his ability to solve it. For industry, it underlines the pressure that borrowing puts on long-term interest rates, further undermining recovery.
The decision on Monday to make the National Savings bond less attractive to savers implies an even higher level of funding from gilts. If National Savings raises pounds 4bn instead of pounds 5bn, it makes only a marginal difference to the amount of gilts to be sold. But in the circumstances, any extra burden is damaging.
This entire argument rests, however, on the assumption that the Government should borrow, from the private sector, the amount required to finance its spending each year. But is that policy, which is in fact only seven years old, really necessary? The counter-case, that the Government should underfund its borrowing requirement while the economy is in the doldrums, is set out this week by Roger Bootle of Greenwell Montagu.
Instead of borrowing to match its deficit this year, the Government should average its borrowing over, say, five years. It would borrow pounds 6bn less than projected this year, pounds 10bn less next year and pounds 3bn less the following year. The shortfall in gilts issues would be made good later by borrowing more than the deficit - overfunding - as the economy recovers.
To make up the difference in the meantime, the Government would run up an overdraft with the banking system, mainly by selling larger quantities of Treasury bills to banks.
This strategy would make companies more optimistic about long-term interest rates and push back institutional funds into property or equities, improving market confidence. The Government would also be seen to be doing something by taking recession seriously. For the moment it is doing the opposite, by borrowing so aggressively that it is pounds 7bn ahead of its target for the financial year so far.
On the other hand, the Bank's success so far in selling gilts would allow more scope for slackening the pace of borrowing later in the year, something that could be forced on the Government anyway if foreign investors' enthusiasm evaporates because of a glut of gilts. An early move to underfunding would bring few risks, and offers real benefits.Reuse content