Gemma Tetlow of the Institute for Fiscal Studies sees December 5
as presenting more of an opportunity than a problem.

The government’s net debt rule – under which public debt as a ratio
of GDP must fall between 2014/15 and 2015/16 – was “never particularly
sensible,” she notes, or constraining since the debt ratio doesn’t even
need to be on a downward trajectory.

“As a measure of debt sustainability, it just reflects a particular
moment in time.”

Osborne has “a number of options”, she says.

The chancellor could rapidly replace the debt target with a new
fiscal rule but it would be better to seek a “more soundly formulated
rule for the longer term which might win cross-party support”.

Senior UK Analyst at JP Morgan Malcolm Barr says Osborne would have
to intensify fiscal tightening by around 25% in the current parliament
(2010-15) to stay on track.

“We don’t think he’ll do that. He’ll push the target back –
everything encourages us to believe that is what he will do.”

Barr urges Osborne to call on the Office for Budget Responsibility
to set a new, robust fiscal rule for the longer term in order to
minimise any loss of credibility in the markets.

“An attempt to build something more durable would encourage
investors,” he says.

Something else to encourage gilt investors is that the BOE is
widely expected to announce in November it will be buying another
stg50bn of UK government bonds. Recent data have by and large left
that expectation intact.

That provides another nice little prop for gilts for the moment.
But time could be running out on QE. Barr believes the BOE will announce
more asset purchases in November, but after that he says the central
bank is approaching a point where if the data flow shows incipient signs
of growth then further QE expansion will be constrained.

PIMCO’s Amey sees a real threat that potential changes to the
linker market arising from the statistical review of the Retail Price
Index could destabilise the gilt market.

This is much more of a worry for him than any re-engineering of
debt targets.

Such a – “wholesale moving of goalposts” as he describes it – could
well provide the catalyst for investors to rethink their view of the
gilts market.

“What does worry us would be a wholesale change to the
inflation-linked Gilt market – these are things bond investors don’t
like,” Amey said.

And the resulting turmoil would be contagious for the rest of
the gilt market too.

Government statisticians are presently studying whether they need
to make any changes to the RPI to bring it into line with CPI. The BOE
would be consulted on whether any proposal is a fundamental change to
the RPI calculation which is ‘materially detrimental’ to the holders of
inflation-linked gilts.

The agreement of the Chancellor of the Exchequer to any RPI change
would only be required where the BOE to consider any change is
fundamental and materially detrimental to linker holders.

For Amey, the issue boils down simply to one of “whether you wish
to destabilise debt markets…”

“One big area where clarity is needed” from Osborne is how the
government plans to get out of its low growth/fiscal austerity loop.

“The government should recognise that very low interest rates can
finance projects we couldn’t in the past,” he says.

More specifically, he wants the Treasury to spell out how
government plans for stg40bn of financial guarantees for infrastructure
projects and stg10bn of guarantees for housing “will actually happen”.

–London Bureau; tel: +442078627492; email: dthomas@mni-news.com

[TOPICS: M$B$$$,MFBBO$,MFB$$$,M$$BE$]