A Plan B for the UK? (Part 2)

Sign at the entrance to the HM Treasury The Treasury may take advantage of the fact there are two definitions of public sector net debt

In my last post I wrote about what the government could do to support Britain's faltering recovery, and how Mr Osborne might borrow more - without formally having to announce a "Plan B". (Since we can be pretty confident he will never do that.)

It turns out there's a wrinkle in my analysis. It doesn't change the basic story, but if I'm right about what the Treasury is planning, it will add to the impression that Mr Osborne is avoiding a formal change of policy, only by being quite flexible with his definitions.

You'll remember on Friday I said that more cyclical borrowing (solely due to slower growth) didn't affect the measure of borrowing that the Chancellor has targeted.

He can also borrow more for public investment under this rule. But extra borrowing along these lines could make it harder to meet the second fiscal rule, which says that Public Sector Net Debt must be falling in 2015-16.

I said the Chancellor could borrow more to support "credit easing", because borrowing to buy or guarantee financial assets would not be included in that debt ratio.

That is true, but not for the reason I stated.

Room for manoeuvre

The ONS does not consider business loans to be "liquid assets" for these purposes, so any borrowing for programmes to support business lending - for example, to buy corporate bonds or packages of small business loans - would be included in Public Sector Net Debt.

But since September 2008 there have been two definitions of public sector net borrowing and public sector net debt, depending on whether the "temporary effects of financial sector interventions" are included.

That is what gives Mr Osborne the wiggle room for more borrowing to support lending.

There is now a big gap between the two definitions of net debt, largely because the ONS took the decision to include all of the balance sheets of the banks that are majority owned by the public sector.

In the second quarter of 2011, net debt (excluding financial sector interventions) was £944.2bn, or nearly 62% of GDP.

Including financial sector transactions, the net debt stood at £2,259bn - that's nearly 150 per cent of GDP. (The so called "Maastricht" definition of General Government Debt is also larger than the one the government prefers, but at least in the same ballpark: in 2011-12 it's forecast to rise to about 85 per cent of GDP.)

At the time of Alistair Darling's 2009 Budget, the Treasury asserted that most of the recent interventions to prop up banks, like buying shares in RBS or Northern Rock, "did not constitute borrowing, as one financial asset is being exchanged for another."

Whatever "credit easing" turns out to mean, you can expect the Treasury to make the same claim. And the ONS will probably agree, especially if it comes down to using the existing Asset Purchase Facility, at the Bank of England, to buy corporate bonds.

Whether the ONS will feel the same way about other schemes to support investment in housing, construction or other parts of the real economy is less clear.

But I bet the Treasury will try to make the case.

'Monetary activism'

The bottom line? The bottom line is that Alistair Darling, of all people, may have provided Mr Osborne with the wiggle room that he needs to announce a Plan A-plus which leaves his iron credentials intact - at least on paper.

On the official version of events, Mr Osborne's credit easing will be an example of "monetary activism", as he suggests - not fiscal policy as many might imagine.

That's despite the fact that the Bank of England is supposed to be in charge of monetary policy now, not the Chancellor. And despite the fact that Mervyn King himself has said that lending to businesses in this way is indeed fiscal policy - a kind of industrial policy - which is why the Bank of England isn't doing it. Phew.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 19.

    2 Hours ago
    I actually have more of a question if someone could answer. The treasury created £75 billion and then proceeded to buy government bonds with it.


    No. They created £75 billion and gave it to the government to spend.

  • rate this

    Comment number 18.

    smoke and mirror accounting and shadow accounting. This is a "If you can't fix the growth and debt figures fudge them" mentality. Desperation is truly setting in. Fellow posters are right stop fudging and playing financial shenanigans and get on with facing the reality of the economics of no growth and sorting out a decent fair society and quality of life. We really can do this without growth.

  • rate this

    Comment number 17.

    To Comfortly Numb

    Cheers that's what I thought. Another 900 billion in QE and we won't have any debt ;-) Very clever of them politically they are screaming austerity to the financial community and giving them enough confidence so that they can print Money without creating another Zimbabwe ;-)

  • rate this

    Comment number 16.

    Why are this govt and the last so reluctant to spend without issuing govt debt. If they unwind QE at the same time, it won't cause any further devaluation, and would mean we could run a larger deficit, for longer.

  • rate this

    Comment number 15.

    We will soon see the government spending money expanding the private sector. The only problem is that the private sector is dead. That will not stop the government spending money on foreign entrepreneurs employing people on minimum wages here.
    All the UK wideboys are working in the City.
    So we need to import them.
    End result still the same.
    We still get in debt.
    Grant aided but foreign masters.

  • rate this

    Comment number 14.

    Would it be useful to know the "capital sum" we as taxpayers will be having to pay back and what the interest might be on all this borrowing? I was informed that if we reduce our deficit by 50% in four years time the debt would have doubled by 5 years and our interest payments could equal the NHS budget. Is that true?

  • rate this

    Comment number 13.

    So finally the artificial, and abstract division between monetary and fiscal policy becomes unmaintainable - the curtain is torn down like the Wizard of Oz, and the truth is revealed.

  • rate this

    Comment number 12.

    2. Rupan

    The answer is that they bought their own debt. They created bonds to generate cash, and then created cash to buy them back.

    Awww!... that can't be right - I must be an economic idiot.

  • rate this

    Comment number 11.

    Debt is debt is debt.

    Reclassifying real debt as 'not debt' is the oldest trick in the book. Politicians in power like it because it passes on to the next generation the need to pay for the current generation's over-spending.

    Economists and Treasury mandarins should be redeployed away from wasting time on such financial shenanigans and put to work producing something useful for the country.

  • rate this

    Comment number 10.

    Sorry Stephanie all this financial talk, I once found facinating, now leaves me bored and is increasingly irrelevent.

    Good people will, once more, have to stand up and be counted to cast the money changers out of the temple.

    That is the only 'plan' that will actualy work, and I think, deep down, most people know that including you. Fancy accounting footword aint gonna do it no more honey...

  • rate this

    Comment number 9.

    Is it just me or does the fellow look more like Pike out of Dads Army these days. 'Dont tell them your name Pike'.

    @2 It means they didnt have to borrow it.

    Dilution is the solution to the pollution.

    At least that is way it seems.

  • rate this

    Comment number 8.

    Could we try a "post-QE" recycle, whereby the BoE relabels and sells off HMG bonds it owns, and spends the cash on UK tollroads, bridges, railways, tunnels, wi-fi and business parks BoE could then sell-off etc?
    A virtuous cycle to counterbalance the daft situation whereby the surplus QE money from the West, seeking higher interest, is lent to BRIC cities and funds: which are themselves dodgy!

  • rate this

    Comment number 7.

    Hmmm Darling says swapping 1 financial thingy for another financial thingy isnt on the books. What happens when 1 financial thingy shrinks then. Like bank share price. Isnt this the sort of doublespeak that got us here. Are Golden Sacks advising, it all looks Greek to me.

    'Activism' yes that would be good it implies some activity, although who knows with doublespeak, it may mean sitting on hands

  • rate this

    Comment number 6.

    The 'Osborne Plan' was never going to work. Half the economy was generated by govt spending. Financial sector, put by some at 30% of the economy, was and is shrinking - its bubble burst, values fell, capital requirements have improved and no significant 'volumes' of infrastructure projects were underway into the medium term.

    It wasn't rocket science to comprehend. Our exporters ARE doing well.

  • rate this

    Comment number 5.

    Ultimately, and prequelly, this country borrows too much for too little return and nothing long term is taking place. The problem government is worrying over is its own borrowing - the history of it is anethma now.

    The real problem is the balance of trade. Our politicians are fixated with their own spending problem. A different way of thinking the problem. Bankers actually understand this.

  • rate this

    Comment number 4.

    Wiggle away but Osborne will not fool anybody. His policy of severe austerity has not worked, in fact the slow down of the economy looks to be accelerating and the government will have a new plan that dare not speak its name.

  • rate this

    Comment number 3.

    Financial rules should work for, not against the people:
    Bend'em like Beckham!
    And the No 1 help for an economy is business lending.
    UK Business Lending is falling as government part-owned banks are run down deliberately, by reducing loan books and client numbers.
    HMG could make banks find and keep customers.
    Put Support back into BSU!
    And stop Europe splitting Lloyds.
    o-kay but o-how?

  • rate this

    Comment number 2.

    I actually have more of a question if someone could answer. The treasury created £75 billion and then proceeded to buy government bonds with it. Does this mean they wiped out £75 billion worth of debt? This may explain why they have been quite generous in past few months by freezing council taxes and new IT projects and money for construction developments.

  • rate this

    Comment number 1.

    Phew thats the word!

    As long as he finances LoisAAAloft Conversions 2 feet above ridge hight now then this government can be saved.

    We should be preparing for the Olympic strain on housing resources whilst harvesting a return because of it ,many will return for holidays if the experience is stress free



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