‘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

ECONOMICS EDITOR

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.

Ben Chu

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
News
i100
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas