Coffee House

George ‘Masterchef’ Osborne spices up the accounts

9 November 2012

4:52 PM

9 November 2012

4:52 PM

Fresh from his success nationalising the Post Office pension, which artificially knocked £23 billion off the national debt, the Chancellor has come up with another manoeuvre which effectively adds £35bn to the total of QE – and analysts think this just save him from having to tear up his fiscal rule in next month’s mini-Budget. CoffeeHousers may remember that two years ago, Osborne said that the debt-to-GDP ratio would be falling by 2015/16. But the outlook between his first budget and his last one has deteriorated rapidly.


But help may be at hand. There is a lot of spare cash from debt interest hanging about in the Asset Purchase Facility: the interest that has accumulated on the gilts bought as part of Quantitative Easing. It was today announced that the cash is being transferred from the Bank of England’s QE budget back to the Treasury. But not all at once! Michael Saunders from Citi explains how he sees things panning out:-

‘This transfer will “be staggered for operational reasons”, and subsequent APF net interest income, which is likely to be about £15bn (1% of GDP) per year, will be transferred quarterly. The overall effect would be to cut the debt/GDP ratio by about 2% initially and (relative to the prior baseline) by a further 1% of GDP or so each year.’

The ‘operational reasons’, I am told, are gilt auctions. Citi says that this move will have the effect of artificially lowering the debt-GDP ratio, but the Treasury disputes this. Either way, bagging cash from the Bank of England’s vaults is — as Saunders says — ‘more or less equivalent to extra QE, £35bn upfront and a further £15bn or so per year thereafter’.

UPDATE: I have amended the above, downgrading my headline from “cooking the books” – the Treasury says that, contrary to Citi’s analysis (and that of Nomura), the payments will not much affect the deficit figures as the ONS will allocate the interest to the year accrued not the year transferred. It will spice up the previous years’ accounts, however.

As Spectator contributor Faisal Islam tweets, this manouvre may have looked liked a Great British Fake-off but it is fairly standard cash management. And the Post Office move (where the government credits its account with the posties’ savings, but doesn’t factor in the liability) is in keeping with the still-dodgy way in which the Treasury accounts (or fails to account) for all public sector pensions.

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Show comments
  • Daniel Maris

    You can’t lump all public sector pensions together. Some are fully financed (which is why for instance the government wants to get its hands on the fully financed local government schemes, for investment purposes).

    To some extent you have to accept that pensions are a part of everyday operational costs. The issue is to what extent long term commitments are covered by those everyday costs. No doubt accountants and actuaries can argue about the fine detail until the cows come home.

  • michael

    Georgie porgie’s mega pork pie .

    To call it a Brownie – would that be a lie?

    So do kiss and tell – who ‘will’ have to pay?

    For George, and the cash, and his farcical play.

  • HellforLeather

    Interesting development in the vote-for/vote-down mechanism at the foot of comments from people responding to others commenting on blog postings

    One can vote positively for a comment without being signed in, but one must be signed in to vote down a comment.

    I’m sure this wasn’t the case until a week or so

  • Kevin

    In the Telegraph, Jeremy Warner’s analysis seems pretty clear: The Bank of England has purchased government gilts with fake money (QE). Until now, the Government has been required to pay interest to the BoE, which could have been used to offset expected losses when the Government comes to redeem the gilts.

    Presumably, the interest was supposed to represent real value that would have gone to reducing the inflationary impact of the fake money.

  • LordBlagger

    Page 4.

    4,700 bn of debt hidden off the books.

    Forget QE fiddles, the real fiddles are the pensions

    • HooksLaw

      Pension obligations are not debt. No more than future obligations to pay the salary of the Leader of the Opposition.

      • TomTom

        They are under EU Accounting Rules for the private sector

  • dalai guevara

    My thirty-five grand credit card bill is just about to see some green shoots – I went to fill up my SUV, paid by Amex and got 5% back on my purchase. If I continue on like this and drive as if there was no tomorrow, I am expecting to be debt free by 2015-16.

  • In2minds

    Osborne, first we like him then we don’t! Oh it was all so happy back in the Rose garden days, what happened?

  • London Calling

    Fiddler on the roof more like……..
    Sunrise, Sunset, now for his next trick…:)

  • ScaryBiscuits

    In other financial wizardry, plans to redefine inflation are well advanced. The official reason for this is to match RPI with CPI inflation, because in theory they should be the same. The happy coincidence is that RPI will be ‘corrected’ down. Osborne and the Bank will then be able to boast (falsely) about what a good job they’ve done.
    Meanwhile, in the real world, pensioners will be robbed again and businesses will suffer from lack of investment. I’m not sure that British people are quite as stupid as Osborne takes them to be. Still, what do I know? It worked for Hollande and Obama. But it can’t work for ever.

    • LordBlagger

      Doesn’t work for the Inflation linked Gilts. All other debts are already changed to CPI, like it or not.

      However, its still not going to work. The debts are still too large. 4,700 bn on the state pension (after being fiddled down)

      • ScaryBiscuits

        A lot of local and central government contracts (rail fares for example) are still linked to RPI and this is still the basis for many staff pay negotiations. Massaging down RPI will therefore have some effect and make the argument for QE easier. I agree that it’s not going to work, however. Reality always catches up with you in the end and the long term effect of fiddling the statistics to confuse everybody and is to make it harder to make the right decisions in the future.

  • Molly

    Sensible move from Osborne (I’m one of his biggest critics). Once the new Governor of the Bank of England is appointed, Osborne and he should agree a one-off restructuring of Government debt. As at time of deflation, it is wrong to worry too much about the inflationary effects of printing a bit of money. A huge proportion of the Govt debt is owed to the Bank of England, which is owned by, guess who…….. us. The Govt has borrowed money which the Bank printed. There is no risk of Argentina or Zimbabwe as long as the restructuring adjustment is one-off AND (big “and”) goes along with a proper cost cutting program. It is is eminently sensible plan and will happen – and if Osborne doesn’t do and and get the credit, Balls will.

    • TomTom

      Deflation ? We have FInancial REPRESSION which acts like Inflation on Household Savings – it is what destroyed pensions in the 1950s when funds were forced to invest in Consols……go read
      Ross Goobey’s Address to the 1956 Conference of the Association of
      Superannuation & Pension Funds to understand why

  • Daniel Maris

    Just testing

  • Daniel Maris

    First there were the tiffs, then the big row, then the separation, and now it looks we are in the run-up to full divorce. Cooking the books is quite a charge to level at a Chancellor.

  • TomTom

    Gordon Brown MkII. He should be buying Gold now so he can sell it at the bottom of the market. I used to think Gordon Brown as a One-Off but now I KNOW he spawned progeny

  • Richard Nabavi

    “As Osborne will know, this makes it all the harder for the likes of us
    here at Coffee House to track his progress on the public finances.
    Already we’re having to adjust for the Post Office pension effect (which
    flattered the figures by accounting for the posties’ savings, but not
    the pension liabilities). Now, on Pre-Budget day, we’ll have to adjust
    the debt figures for his latest fiddle.”

    Or you could just read the figures given by the independent Office of Budget Responsibility.

    There’s no fiddle: as with the Royal Mail pension transfer, it will no doubt all be laid out clearly, with and without the effect of the changes. This is the diametric opposite of Gordon Brown’s approach.

    • LordBlagger

      See page 4. Not on the accounts

    • HooksLaw

      I am not surprised that Nelson has downgraded his headline. It was totally unjustified. And I believe the govt are not quoting the mail pension fund in official statistics. It is certainly generally excused in reports.

      But then Nelson and his website and his standards are going rapidly downhill.

      • telemachus

        You will find a receptive audience with the vicar

    • telemachus

      For God’s sake.

      Osbourne is a conjurer. Fraser with regard for his own future economic posts withdrew a true cooking the books and now you say there is no fiddle.

      Osborne cannot stomach the fact that he got it wrong

      He stoked recession rather than growth when he took over and now that we see a few green shoots he fails to water and fertilise them

      And at the end of all this there are distraught folk in wheelchairs wondrring about their next meal and mothers wondering about sending their kids to school Angela’s Ashes style without shoes on their feet.
      While IDS is contemplating sterilising the poor China-style once they have had 2 kids.
      We are truly in a non caring revanchist state

    • Dimoto

      Fraser Nelson and most of the commentariat are still making heroic assumptions about the deficit (under) performance, although we are only half-way through the financial year. How about waiting to see the outcome before getting all suicidal ?
      The revenue figures have been all over the place so far, but still they make their simplistic “projections”.

  • Jupiter

    Yo Nelson, when are you going to hire some conservative writers for this blog?

    • dalai guevara

      what’s not conservative about the reporting? d’you wanna drink some kool aid, dude?

  • Derek

    Finally confirming that these idiots really are brown’s apprentices. The manipulation of money has so distorted the normal functioning of credit markets as to render the market impotent. Funding for lending has destroyed retail deposit interest and QE has artificially reduced the cost for the govt. Osborne would be paying Spanish rates but for QE. It has entrenched the brown legacy and stifled growth for the next ten years. Common sense would suggest not lending to a govt over spending by ten percent per annum at just 1.6 percent for ten years but maybe I am the idiot.