Lies, damned lies, and a wartime legacy
Back in October, Toby Nangle, head of multi asset allocation and co-head of global asset allocation at Threadneedle Investments, a UK-based fund manager, wrote a guest post on FT Alphaville in which he argued that the Chancellor should call in the UK's War Loan. The War Loan was issued by HM Treasury in 1932 and is one of the oldest bonds in the market today.
"The UK Government could reduce its debt and save the taxpayer £300m by exercising its right to call the ‘War Loan’ and refinance it with new perpetuals with the same coupon but a thirty-year non-call period or new long-dated bonds.", said Nangle.
The Chancellor took his advice. As part of the Autumn Statement, he has announced that the Government will call in not only the War Loan, but other historic gilts too. From HM Treasury's Press Release:
The Chancellor of the Exchequer, George Osborne is today (Wednesday 3 December) announcing that the government will repay all the nation’s First World War debt.The 1932 War Loan - itself a lower-rate refinancing of a previous War Loan - will be called on March 5th 2015. Other historic gilts will be called in due course.
The Chancellor also announced that the government will adopt a strategy to remove the other remaining undated gilts in the portfolio, some of which have origins going back to the eighteenth century, where it is deemed value for money to do so.
But HMT's press release includes the following extraordinary statement from the Chancellor:
"Pay off the debts"? No, George, just no. If I refinance the mortgage on my house to take advantage of today's lower rates, I have not "paid off" my mortgage. I have paid off the old mortgage, yes, but I have taken out a new one for the same amount. I still owe the money.This is a moment for Britain to be proud of. We can, at last, pay off the debts Britain incurred to fight the First World War. It is a sign of our fiscal credibility and it’s a good deal for this generation of taxpayers. It’s also another fitting way to remember that extraordinary sacrifice of the past.
In fact HMT's press release makes it very clear that the debt is being refinanced, not paid off:
The government will now be able to refinance this debt with new bonds benefiting from today’s very low interest rate environment....So Osborne's claim that this debt is being "paid off" is simply wrong. It is, in short, an outright lie designed to impress voters.
And there is another lie here, too. The second part of that sentence reads:
....which in part reflects confidence in the plan the government has put in place to cut borrowing and create a resilient economy.Low interest rates are a sign of confidence, are they? Then why are Italian and Spanish government bonds trading at lower interest rates than the UK's? These days, low interest rates don't indicate confidence - they are a forecast of poor growth and low returns. They are a sign of weakness, not strength.
In fact it is hard to argue that there is any confidence at all in the plan the government has put forward to cut borrowing. Osborne has failed to deliver on the plans he set out at the start of this parliament: the deficit is still above 5% of GDP despite recent encouraging growth. And the plans in the Autumn Statement to eliminate the deficit have failed to convince anyone.
UK gilts remain attractive to investors because the UK economy is currently performing well, not because anyone believes anything George says. That is the reason why UK borrowing costs, far from being low, are actually quite high relative to the rates paid by many other developed countries at the moment. And we do not want rates to be any lower. We would like them to be higher, really - that would indicate that the economy is really on the road to recovery. But the government's plan is if anything likely to ensure that they remain very low for a very long time. Spending cuts on the scale envisaged in the Autumn Statement would knock the stuffing out of the economy - again.
Refinancing the War Loan and other long-standing gilts while rates remain low by historic standards is eminently sensible. But the Chancellor's claim that being able to refinance the War Loan at lower rates indicates confidence in government plans is not just a lie, it's a damned lie.