UK: QE could fund a £20bn tax giveaway
16 August 2012
Posted by: SAIT Technical
By Philip Aldrick (The Telegraph)
Michael Saunders, UK economist at Citi, said the Government could use the "accumulated profits from quantitative easing (QE) to finance a special temporary tax cut for a year or two”. According to official figures, the "potential profit” by February 2013 from QE to the Bank is £20.7bn – more than enough to knock 2.5p off income tax for a year.
The real potential profit is even larger as the QE programme has been extended by £50bn to £375bn since the official figures were compiled, and several economists expect the Bank to add another £50bn before the end of the year. Mr Saunders said the profits could reach £30bn by 2013, which could fund a two-year tax giveaway.
He was reviewing the Government's options in light of the double-dip recession that has seen the economy shrink 1.4pc in the past nine months. A growing number of experts, including the IMF, have suggested the Chancellor should respond by delaying some of the austerity measures planned for next year.
A delay would usually mean increasing borrowing, Mr Saunders said, which "might well cause the UK to lose its top-notch credit rating”. To avoid the damage to the credit rating, the Government could reclaim the profits from QE, he added. "The superficial attraction of this proposal for the government is clear: recycling this money to voters rather than leaving it idle at the Bank,” he said.
The Bank is sitting on QE profits because it bought gilts with money it has effectively printed. The gilts pay interest which is collected from the Government. Although the arrangement means the funds are effectively moved from one arm of government to another, it is still recorded as a normal payment .
"The UK approach appears to differ from that in the US, where the Federal Reserve deposits its earnings into the Treasury's account each week,” Mr Saunders said. Tax rises and spending cuts amounting to 1.5pc of GDP are planned for next year. Mr Saunders believes using QE profits could reduce that to 0.5pc.
According to the National Institute for Economic & Social Research, delaying austerity would have boosted growth by 1.7 percentage points this year.
Despite the attractions of the scheme, Mr Saunders warned it could call into question the Bank's credibility by making "UK fiscal options dependant on monetary policy” and undermine the Government's deficit-fighting reputation by making it look like it was trying to "massage the numbers”.
"If the Government concludes that a slower pace of fiscal consolidation is justified, it should argue its case honestly and openly, rather than try to dodge the question,” Mr Saunders said.