George Osborne urged to use QE windfall to stimulate growth

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

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The Independent Online

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.