Chancellor to tap savers for cheap money to plug borrowing
JEREMY HUNT is preparing to tap savers for more cheap cash this year, even as higher tax revenues and lower energy prices reduce the Treasury’s borrowing bill.
It is understood the Chancellor will ask National Savings & Investments (NS&I) to raise more money for the Government in this week’s Budget, as the Treasury attempts to broaden its funding sources.
NS&I is backed by the Treasury, so when customers invest in its products they are effectively lending to the Exchequer. British households are sitting on an estimated £180bn of excess savings that the Treasury hopes to tap into as people seek better returns.
Accessing household savings is an attractive option at a time when bond prices are volatile. Investors continue to be nervous about how quickly inflation will fall back to the Bank of England’s 2pc target and how much debt the Government will issue this year, which has kept market borrowing costs high.
NS&I currently has a target of raising £6bn this financial year, which it achieves by increasing interest rates to attract more money or bringing new products to the market.
Sources indicated that the increase in NS&I’s so-called net financing target was unlikely to be much higher than recent historical averages of around £10bn because of increasingly competitive interest rates offered elsewhere in the market. Premium Bonds are already offering their highest returns in 15 years at 3.3pc in a boost for more than 22 million savers who enjoy tax-free returns. The rate has propelled NS&I close to the top of current best buy tables.
Rishi Sunak’s attempt to raise the financing target from £6bn to around £35bn during Covid in 2020 resulted in NS&I raising just £23bn.
Efforts to diversify funding come as economists warn that government debt issuance this year will hit its highest wlevel outside the pandemic and financial crisis, which is likely to push borrowing costs up further.
Stronger than expected growth will result in the Government having to borrow around £30bn less this year to plug the gap between tax receipts and funding for public services. It will also reduce Mr Hunt’s cash needs by around £20bn, thanks to the impact growth has on the tax take. The Treasury’s so-called “net cash requirement”, which reflects the Government’s cash needs, has been reduced by £120bn over the past decade thanks to profits from the Bank of England’s quantitative easing.
However, the Bank is now selling up to £80bn of bonds this year instead of buying, which pushes up the Government’s costs under the terms of QE agreed at the time of the financial crisis.
Threadneedle Street’s own estimates suggest the Treasury will have to pay the Bank around £35bn to cover losses on its bond sales this calendar year alone. This will increase the amount the Treasury must raise from other sources, including foreign investors, pension funds, banks and British savers.
Economists expect the Office for Budget Responsibility, the Government’s tax and spending watchdog, to this week revise up its forecasts for near-term growth.
Treasury sources said it always pursued “cost-effective financing for the government”, while NS&I’s remit instructs it to balance the interests of savers, cost to the taxpayer, and the stability of the broader financial services sector. A Treasury spokesman said the Government would set out its finance plans in the Budget.