Rachel Reeves could fill a big part of the £50bn black hole WITHOUT cuts or punishing tax hikes, says Jeff Prestridge

Bond fund manager Bryn Jones has come up with a novel way for Chancellor Rachel Reeves to fill a big part of the £50billion black hole in the public finances without raising taxes. 

It sounds like a plan to bring music to the ears of millions of households who fear an attack on their personal wealth is coming their way in the Budget scheduled for November 26.

Jones, head of fixed income at wealth manager Rathbones, says the Government should seriously consider buying back some (if not all) of the UK gilts issued during the Covid 19 crisis of 2020 when the economy teetered on the brink of collapse – and then use the proceeds to issue new gilts.

By doing this, he says, the government would be able to reduce its debt pile by billions of pounds. ‘It’s a no brainer,’ he says.

How it would work is best illustrated. Back in May 2020, when the country was in lockdown and interest rates had plunged to 0.1 per cent, the Conservative Government raised just short of £26.5billion from the issue of a gilt with a coupon of 0.5 per cent and a maturity date of October 2061 (Treasury 0.5 per cent 22/10/61). 

Idea: Bond fund manager Bryn Jones has come up with a novel way for Rachel Reeves to fill a big part of the £50bn black hole in the public finances

At the time, the coupon (the fixed interest payment that the holder of the gilt gets) was attractive at 0.5 per cent, with interest payments being made twice a year.

Yet rising interest rates – now at four per cent – have resulted in the price of this gilt (issued at £100) sliding and sliding some more besides. 

It’s now trading at around £25, resulting in an income yield of just over two per cent (often known as a running yield) and a gross redemption yield (including any capital uplift as the bond heads for maturity) of just over five per cent.

Jones says the government should now buy back this debt, in effect at a massive discount to its issue.

So instead of being left with a debt of £26.5billion to repay in 2061, it would pay £6.6billion now to buy them back and cancel the low coupon UK gilt. 

This would shrink the government’s debt pile by just short of £20billion. 

It could fund the buy back, says Jones, by issuing £6.6 billion of new gilts with a maturity date ten years down the line. 

Recent demand for new issues of ten-year UK gilts, says Jones, has been overwhelming, so the Government wouldn’t have a problem getting any issue away.

Jones says there are 10 UK gilts (including Treasury 0.5 per cent 22/10/61) with coupons below 1.5 per cent and maturity dates between 2035 and 2072 that the Government could buy back – and in the process reduce its debt pile by billions of pounds (around £130billion).

Of course, many of those investors who hold the UK gilts that Jones thinks should be cancelled won’t be happy, especially if they bought them back in 2020. 

They’ll take a capital loss. Offering to buy them at a premium to the current price would go some way to address any consternation. 

Even if bought at a premium, the Government would be reducing its debt mountain.

But by clearing out low coupon UK gilts and replacing it with higher coupon debt, Jones says it would provide more investors with attractive income options, especially if they held the UK gilts within a tax-free pension (self-invested personal pension ) or Individual Savings Account.

It would also curb the liking among wealthy investors to use low coupon UK gilts to shelter savings from tax. 

This is because there is no capital gains tax on capital profits from UK gilts, so wealthy investors buy them when their prices are low and reap attractive capital gains as the bonds edge ever closer to their maturity date. 

Given the coupon is so low, they pay minimal income tax (apart from those gilts held inside a pension or Isa).

Jones says: ‘This is a no brainer as far as I am concerned. It’s time to stop pointing the finger at each other and do something decisive and funky to reduce the Government’s debt pile – and putting a break on a nasty Budget for prudent savers and investors.’

How about it Ms Reeves?