The device abandoned are index-linked national savings certificates. These offered savings at the rate of inflation plus 1% for five years, with tax-free returns; they have recently been paying out at 6%, which I’m sure no one reading this would sniff at.
This fund raising instrument is a wise thing to use when inflation is low, because the Government only has to pay 1% on top of the inflation rate. However, despite the amount of money it needs to raise, and despite this being a very popular investment, the Government has withdrawn it.
What can we infer from this action? I think it is safe to assume that the Government, either alone or in coordination with Mervyn King, is planning to inflate away some of the nation’s debt.
This might be the first sign of this Government doing something sensible on the economy. The irony of course is that most people who identify as Conservatives will find the proposed policy positively evil.
But, in fact, I think this would be a good idea for a couple of reasons.
Because the UK’s debt is mostly long term , with an average maturity of 14 years, a little surprise inflation won’t lead to a significant rise in the cost of financing the debt. We can reduce our debt burden without risking increasing by much how much we pay for our debt.
The other good side to a rise in inflation is that it makes holding money less attractive and investing more attractive, which is exactly what our economy currently needs to boost demand, growth and jobs.