‘Cancel £50bn of national debt to aid the recovery,’ says ex-FSA boss Lord Turner of Ecchinswell
Bank of England urged to announce that bonds acquired as part of its monetary stimulus programme will never be sold back
A senior and respected figure in the world of financial regulation has called on the Coalition to unilaterally cancel some of the country’s national debt in order to help rebalance the recovery.
In an interview with The Independent Lord Turner of Ecchinswell, a former chairman of the Financial Services Authority (FSA), has suggested the Treasury and the Bank of England should announce that around £50bn of the £375bn of government bonds that the central bank has acquired as part of its monetary stimulus programme will never be sold back to the financial markets.
This so-called “monetisation” would represent a major taboo in the world of economic policymaking where it is generally believed that such debt cancellations inevitably result in destructive inflation.
But Lord Turner, who is a fellow of George Soros’s Institute for New Economic Thinking, insists the bank would be able to prevent the monetisation resulting in soaring prices and argues that it would make the recovery more sustainable.
The timing of the call will surprise many, because the consensus is that the UK economy is growing and no longer requires such unorthodox monetary policies. But Lord Turner, who was one of the bookmakers’ favourites to succeed Mervyn King as Governor of the Bank of England last year, said the public debt cancellation would enable the Government to reduce its planned cuts over the coming years and to push through a fiscal stimulus, which would drive the recovery in a way that avoids another dangerous build-up of private debt.
“We could take some of the bonds on the Bank of England’s balance sheet and simply convert them to non-interest-bearing debt,” he said. “That would reduce the public debt, which would slightly reduce the constraints on future fiscal policy and further reduce the amount of interest you’d have to pay on the debt.” The Bank is expected to start selling back its bonds over the coming years, but not before it has raised interest rates.
Lord Turner, who was chairman of the FSA through the 2008-09 global financial crisis, is alarmed by projections from the Office for Budget Responsibility (OBR) showing household debt returning to pre-crisis levels over the coming years as the recovery advances. He argues that this “re-leveraging” could sow the seeds of another crisis.
“If the OBR is right… the private sector turns back to the level of leverage that got us into the mess in the first place,” he said. “If you think that one of the problems that we’ve had is an over-leveraged household sector and a resulting debt overhang effect, [that] is concerning.”
Lord Turner dismisses the argument that monetisation would stoke inflation as “not true” and argues monetary impact of the debt cancellation can be offset by compelling banks to hold larger reserves of liquidity at the Bank of England. He first spoke of the possible economic benefits of debt monetisation in 2012. But this is the first time he has made a recommendation for the policy to be implemented in the UK.
At the end of April the national debt stood at £1,270bn, equivalent to 75.6 per cent of GDP. It is projected to peak at 78.7 per cent in 2016. The Bank of England began acquiring government bonds in 2009 as an attempt to stimulate the economy in the recession and now holds around a third of the outstanding total by value.
The Government is set to spend £53bn on debt interest in the 2014-15 tax year, much of which flows directly to the Bank as the holder of the bonds. The Bank is now paying the profits from its bond portfolio to the Treasury, but this does not affect the OBR’s measure of the government deficit, thus having no beneficial impact on the planned rate of spending cuts.
Economic boost: The Turner plan
What is the proposal?
The Bank of England bought £375bn of Government bonds between 2009 and 2012 to support the economy. That’s about a third of the national debt. The plan is to sell those bonds back to the private sector but Lord Turner wants the Government to announce that about £50bn will never be sold back.
How would that work?
The Treasury and the Bank would need to convert £50bn of bonds into “perpetual non-interest bearing debt”. This means the Government will no longer need to pay interest to the Bank for the borrowing, nor redeem the principal amount. That would effectively mean a £50bn chunk of the national debt being cancelled.
What would be the purpose?
It would cut the debt interest bill (currently £53bn a year). Lord Turner argues the Chancellor could use this new fiscal leeway to drive the recovery more sustainably than relying on another surge in household debt.
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