Treasury concerned over lack of gilt sales

Uncertainty over Britain’s ability to repay debt billions

Gordon Brown’s plan for another stimulus package was dealt a severe blow yesterday after the Government failed to sell gilts for the first time since 1995.

The Prime Minister had hoped the sale of government gilts to investors would raise the money necessary to borrow billions of pounds. Instead there is fear within the Treasury and in the City that Britain will not be solvent enough to repay the huge mount of debt it has already acquired for the purpose of bailing out banks.

For the first time in over a decade, investors refused to take up the full complement of gilt-edged bonds sold at an official auction. Gilts are financial instruments that the Government sell to raise funds for public spending or to fund borrowing. Issued by the Treasury, investors can expect to receive an annual rate of interest from the Government in what is considered to be the safest way of investing.

Brown’s government are planning to increase public spending as well as make tax cuts, designed to get the country out of the grips of recession.

The shadow chancellor, George Osborne spoke for many when he expressed his grave concern for Britain’s economic future. He said: “The failed gilt auction, the first for many years, should be of real concern to everyone.” Adding, “It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts.”

The Treasury is usually oversubscribed with investors looking to snap up government gilt bonds, however, yesterday’s performance at auction served as another reminder of the dire straits we are in as a nation – interest was said to be at the lowest ebb in history.

Once knock on effect could be that Britain’s credit rating could be cut, which makes any future borrowing more expensive. Interest rates on the Government’s debts rise when gilt prices fall.

David Cameron, the Conservative leader, warned that we could face an even longer recession. He said the gilt auction was a “worrying sign, because higher interest rates will increase the cost of paying for the national debt and could deter the investment we need to get us out of this recession. That would make the recession longer”.

Britain’s national debt is forecast to rise to more than £1 trillion by 2013, with the PM already having scrapped the usual “golden rules” that limit public borrowing.

Going into the G20 summit in London, Mr Brown was expected to encourage other nations to stimulate the growth by revising their financial approach to the recession. He may be forced to change tact if his gilts remain left on the shelf.

Mr Brown already has a tough challenge ahead. Many of his European counterparts are increasingly concerned about scale of borrowing being embraced by the USA and Britain. 

Mirek Topolanek, the Czech prime minister, who held the presidency of the European Union as part of the six-month rotation system, called the Anglo-American recovery plan a “way to hell”.

In what may already be seen as a 180 on public spending and tax cuts, Mr Brown appeared to support quantitative easing as the preferred means of rescuing the economy.