Cutting Borrowing Costs Made Simple: End Interest Payments

This week gave us a titanic intellectual battle between Labour Shadow Chancellor Rachel Reeves and Tory Treasury Minister Andrew Griffiths.

Reeves appealed to the dubious authority of the Institute of Financial Studies:

They said that the way to tackle that risk was to sell more long gilts, in other words: use a longer term, lower cost borrowing approach that would have protected public money more from sudden spikes in interest rates.

Griffiths countered:

The Institute for Fiscal Studies report referenced in Labour’s analysis, calls for more index-linked gilts.

It was like watching two bald men fighting over a comb.

The correct “longer term, lower cost borrowing approach that would have protected public money from sudden spikes in interest rates” would be to use the Ways and Means account at the Bank of England and stop issuing Gilts altogether.

The ‘government borrowing rate’ would then drop to the Bank Rate. The Bank’s profit would return to HM Treasury as the Bank Dividend, reducing the cost further.

After all, who would you borrow from if you owned a bank outright and received all the profit?

To avoid the impact of a ‘spike in interest rates’, we should stop the Bank from needlessly raising rates. Instead, we should follow the example of Japan and keep them permanently low, preferably at zero.

British mortgage and rent payers would no doubt agree.

The Bank has missed its inflation target 107 times in the last 180 months. How much longer before we accept changing the base rate doesn’t work?

The Tories did make one amusing point:

“The UK Government issues more inflation-linked gilts than international comparators because the structure of our pension system relies less heavily on state-backed pensions.”

The finance industry’s hubris is on full display here. If a pension fund relies upon index-linked gilts to cover its liabilities, how is it anything other than state-backed?¹ Wouldn’t it be more cost-effective to cut out the middleman?

If the Golgafrinchans built their Ark Fleet Ship B in the UK, we’d need two of them.

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