21 Feb 2013

Now that is what I call magic, Treasury style…

Washington Correspondent

Even with some fiscal hocus pocus that gives the Treasury an extra £3.8bn, government borrowing in the year to date is still worse than this time last year. And that should worry the chancellor.

You see these interest payments I’ve just put in your wallet? Now, close your eyes and I’m going to tap the wallet three times, and hey presto, the money is now back in my wallet!

To most of us, the idea that we could get our mortgage company to give us back the interest payments on our home loan sounds like a dream come true. But of course it’s something that could never happen.

Yet that’s exactly what the Government’s just done with the Bank of England.

Rather than banking the interest payments owed to it by the Treasury under the Quantitative Easing (QE) programme, the Bank of England has instead collected those payments and transferred the whole lot straight back to Mr Osborne. All £35bn of it.

There’s nothing illegal about it, the same thing has happened in Japan and the United States.

But what timing! Just when the Treasury needs it most.

We all knew this little fiscal trickery would help boost Government borrowing, but what’s really worrying for Mr Osborne is that even with £3.8 billion of the interest payments included this month, borrowing in the year to date is still worse than this time last year.

Even when you include a string of one-off items – those QE interest payments, a profit from a special lending scheme to banks, and a one-off gain from the Royal Mail’s pension scheme – borrowing is still £1.5bn higher in this fiscal year than last.

And it goes without saying that if you exclude those items, things are worse still: this year’s borrowing would then be £7.5bn higher than this time last year.

All of which paints a rather worrying underlying picture, however the Treasury likes to spin it.

The truth is the public finances are going in the wrong direction. It’s something that Mervyn King, the Governor of the Bank of England more than alluded to yesterday, with his admission that more QE might be required.

And it is something the markets have alluded to as well, as investors have pushed sterling down against the dollar to its weakest level in more than two years.

Vince Cable says that’s indicative of a trend that’s been underway since 2009 and actually, a weaker currency is good for exports. Both of which are true.

See his interview in full here: Vince Cable on the economy

But hedge funds booting sterling around like a football (it’s the second most shorted currency after the Yen) is a clear sign that investors are beginning to doubt the credibility of Britain’s finances. And there’s been a marked acceleration of that in recent weeks, however Mr Cable and Treasury officials like to spin it.

One of those, Sajid Javid, Economic Secretary to the Treasury, was definitely pushing that line today, insisting he was confident the Government would meet its borrowing targets for the full year.

We’ll know if that’s true in a couple of weeks time, when Mr Osborne presents his budget. Given the figures today, some say he’ll have to delve deep to pull a rabbit out of his hat this time.