The Spending Plan policy 21: stop paying over the odds to borrow money

May 11, 2015 1:46 PM

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National Savings and Investments (NS&I), the state-owned savings bank and investment organisation, has traditionally been a cheap way for the UK government to finance its borrowing requirement. Given that that NS&I is 100 per cent backed by the government, their deposits and savings products are considered safer than those of commercial banks so interest rates are usually low. It has often been cheaper for the government to borrow through NS&I than the gilt market.

However NS&I has increasingly been used by the government as an electioneering tool. This is best illustrated by the recent sale of £7.5 billion worth of “65+ guaranteed growth bonds”, more widely known as “pensioner bonds”. The one and three year pensioner bonds pay an annual interest rate of 2.8 per cent and 4 per cent respectively.

By comparison, on 11th February 2015, the Debt Management Office held and auction in which it was able to sell £1.75 billion of conventional 3.5 per cent Treasury gilts with a maturity date of 22 January 2045.109 They were able to sell the gilts for as much as £124.52 with bids exceeding the allotment 1.58 times over. Because the DMO was able to sell the gilts for more than their par value, the yield to maturity at average accepted price was significantly lower than the coupon rate – just 2.358 per cent.

Simply put, the government was able to borrow more cheaply for 30 years on the gilt market than it chose to from pensioners for one year.

Some of the products sold by NS&I are needlessly increasing borrowing costs and undermining commercial banks and other financial services providers.

Savers have a wide range of investment products like ISAs and savings accounts. So given that government can able to borrow cheaply on the gilt market, the Treasury should stop accepting new deposits and selling bonds through NS&I.

Interest should continue to be paid on existing investments and all bonds with maturities should be honoured.

 

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