The Budget: Public debt financing rules relaxed: Borrowing

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The Independent Online
IN A move to ease the problems of financing the Government's pounds 50bn budget deficit next year, the Chancellor yesterday relaxed the rule governing the way the Treasury finances the public sector borrowing requirement and set a new, higher ceiling for the growth of the money supply.

His decision to ease the 'full fund' rule means in effect that the Government has decided to borrow from the banks to help finance the excess of public spending over tax revenue. At present, the Treasury is committed to funding the deficit by selling bonds to individuals and institutions only.

Mr Lamont said that from now on purchases or sales of gilts by banks and building societies would count as funding or reducing the financing of the PSBR.

He made it clear that the measure would ease pressures on the financial markets, which are expected to finance the swelling PSBR. The Chancellor also hoped the decision might lead to a strengthening in the growth of broad money supply M4 - chiefly cash and bank accounts.

The Chancellor also widened the 'monitoring range' for annual growth in M4 to 3-9 per cent for the rest of the Parliament from the 4-8 per cent range for this financial year set in the Autumn Statement. M4 grew by 3.2 per cent in the year to January, so this shift in the monetary goalposts brings M4 growth within its desired range.

The Treasury said M4 had been depressed by low growth in bank lending to individuals late last year. The widening in the range was justified by the longer period to which it now applied.

The Chancellor also downgraded the importance of growth in the narrow money supply measure M0 - cash and banks' balances at the Bank of England - as a guide to potential inflationary pressures. M0, like M4, now has a 'monitoring range' rather than a 'target range'.

The Chancellor left the desired range for growth in M0 at zero to 4 per cent, despite it rising by 4.5 per cent in the year to February. He said M0 might well rise above the ceiling for a while, but 'should fall back in the medium term'.

The Red Book said that if either M0 or M4 were outside its monitoring range this would be 'a cause for concern'.

The widely expected decision to ease the full-fund rule follows mounting concern that the Treasury might face problems in financing the largely recession-induced explosive growth in borrowing without driving up long- term interest rates.

Under the full-fund rule, the Government obliged itself to finance the full amount of the PSBR, together with any maturing gilt-edged stock and any changes in foreign exchange reserves, by sales of gilts to the private sector.