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£11 Billion to Be Wiped off Budget Defecit

Written by Sam Jones on 10 November 2012.

But is it a Sleight of Hand? The UK Treasury is to be handed the interest the Bank of England earns on Government debt it holds as a result of quantitative easing it has been announced. 

In March this year, the Bank held £24billion of interest which it received in payment for the  £375bn gilts it owns. It is predicted this is set to increase to £35bn by March next year. The transfer to the Treasury  will cut the government's borrowing requirements and the net debt it reports in its national  financial accounts.  

The Bank has been purchasing Government debt  in order to boost the economy. However, the interest income ultimately belongs to the government , but until the recent clarification, the interest has been sitting unused in a authorised, dedicated account  called  the Asset Purchase Facility (APF) This is held at the Bank in Threadneedle Street.

A Treasury spokesman stated that  "Holding large amounts of cash in the APF is economically inefficient as it requires the government to borrow money to fund these coupon payments," Moving forward, any additional payments of interest received by the Bank will be transferred back to the Treasury at the end of each quarter.

The bank will however be able to deducts its own cost of borrowing. The reality of this mechanism according to Robert Peston, BBC's business editor is that the Government is able to reduce its budget deficit by about £11bn a year, based on the Bank's current cost of borrowing.

The decision follows the  Bank of England's Monetary Policy Committee (MPC) decision on Thursday, which voted to keep bank base rate on hold . It also confirmed  that it would not be increasing its quantitative easing (QE) amount. The decision keeps  the stimulus programme's total now at £375 billion.

The base rate continues at its record low of 0.50% where it has remained since 5 March 2009.  This has allowed a number of borrowers to obtain a low interest mortgage. It follows the recent office of National Statistics (ONS) figures that the UK is no longer in recession.

 

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