George Osborne urged to use QE windfall to stimulate growth

TUC warns Chancellor not to put fiscal targets above boost to recovery

The proceeds of George Osborne's £35bn quantitative easing windfall should be used to stimulate the economy, rather than to save the Chancellor's face, trade unionists urged yesterday.

The Government intends to transfer cash that has accumulated at the Bank of England thanks to its £375bn money-printing programme to the Treasury, where it will be used to reduce the Government's borrowing.

Analysts have suggested that, by cutting the recorded size of the country's debt, this could help Mr Osborne avoid the embarrassment of breaching his own "fiscal mandate".

The Treasury's watchdog, the Office for Budget Responsibility (OBR), was widely expected to rule next month that Mr Osborne is set to miss his target of putting public borrowing on a declining path as a share of GDP between 2014-15 and 2015-16. But this move could enable the OBR to say that he is still on course.

"[This] may just be enough for the OBR to project that the Government will probably hit its target of falling debt/GDP ratio in 2015/16 whereas previously that appeared out of reach," said Michael Saunders of Citigroup.

But Brendan Barber of the Trades Union Congress said the Government should spend the money on infrastructure projects to assist the recovery rather than cutting public borrowing.

"The Chancellor can play politics with this by claiming he is nearer his failed deficit-reduction target," he said. "Alternatively he could invest £35bn in boosting economic growth to kick-start recovery."

Mr Barber also pointed out this extra spending entailed no risk of an adverse reaction from the bond markets – the usual objection to fiscal stimulus – because Mr Osborne would be borrowing no more than he previously outlined.

The transfer of the cash – the coupon payments from gilts – from the Bank of England to Whitehall is strictly an accounting change because the Government has committed to pay the money back to the Bank when it unwinds the asset purchases.

But the Governor of the Bank of England, in a letter to the Chancellor, also noted that, in the short term, the move represented "an easing in monetary conditions" as it meant the private sector holding less government debt than they otherwise would.

The Treasury said that the reform merely brought the UK into line with the practice of the US and Japan, whose banks have also engaged in extensive quantitative easing.

Robbing Peter to pay Paul? QE Coupons

When the Bank of England buys government bonds it acquires an income stream as well as an asset. Those gilts pay out a regular coupon, or a cash payment. The Bank has received those cash payments for three-and-a-half years and they have racked up to a hefty £35bn. But now the Chancellor has decided this is inefficient, saying that because the Bank and the Treasury are both part of the public sector the Government is effectively issuing debt to pay interest to itself. Yet there’s a complication. When the Bank, eventually, starts to sell off its portfolio of gilts it will register a loss. Those coupon payments were supposed to help cover that loss.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate