By the time the Covid-19 pandemic is behind us – so at least until the end of 2021 – the Government’s borrowing requirement will probably have increased by somewhere around £350 billion.
To help the Government finance this the aim would be to take as much as possible of this effectively ‘off balance sheet’.
This would be achieved by issuing a variant of ‘ War Loan’ to retail and wholesale domestic and international Investors. The Country has been through a traumatic event in financial terms that is not dissimilar to fighting a War. As on previous occasions to pay for this the Treasury and Bank of England need to come up with a new financial instrument that will attract wide domestic but also international support to finance viably the costs that have been incurred.
For this measure to be successful some of the previous features of War Loans raised would be followed with additional elements to attract widespread market support:
– the size of the Issue will clearly depend on market appetite which will in large part rest on the features outlined below but the object would be to raise not less than £100 billion.
– The loan/ Issue would have a 30 year maturity and a ring fenced sinking fund contributed by the UK Governemnt of not less than 3.333% per annum. The sinking fund would either be rolled up or used, after an initial 3 year grace period, for a window of annual redemptions up to the amount of the accumulated sinking fund with priority given to UK resident domestic investors. On a £300 billion issue there would be an annual sinking fund of £10 billion which is eminently financeable by the UK government.
– the Issue would carry a fixed coupon sufficient to attarct domestic and interantaional support. In current market conditions this would probabaly need to be in the region of 2.5% to attract wholesale investsors such as Institutional pension funds and life assurance companies and funds. On a £300 billion loan this would amount to an annual servicing cost of some £7.5 billion. Again this additional annual cost is well within the Government’s capacity.
The above is not an exhaustive list and it will need to be refined but such an Issue if well structured should attract very sizeable demand. Clearly the Government can continue to fund its bugeoning borrowing requirement on the current ‘pay as you go’ basis of issuing short and slightly longer term gilts without any ring fencing and in the short term this may be the cheaper option at the current level of interest rates. There are several reasons for thinking however that the more prudent and forward thinking approach is to take the maximum possible amount off balance sheet while benign conditions prevail:
– Interest rates at which the Government can borrow are likely realistically only to go up rather than down over the medium term.
– this would be a good instrument to give savers, including UK domestic retail savers, a reasonable and secure rate of return on cash deposits that is not currently available in the market particularly since the recent changes to NS & I savings rates.
– attracting new (including international) money to the UK materially lowers the Government’s total overall borrowing requirement freeing up capacity to invest in supporting new investment in growth sectors of the UK economy.
Other governments may well come up with similar ideas sooner rather than later. The UK post a smooth Brexit transition (one of the few benefits of Covid is that the media hysteria about future trading impediments have been largely overshadowed and allayed) has a good credit history and is in a relatively strong position to undertake successfully such a large Isuue but it needs to get on with it if it is to have prime and first mover advantage.