---

Economic Recovery

I am not saying that, I am saying that QE will have to come to an end when the timing is right. Some of the tactical and practical details of QE are best left to the Bank of England. To return to the deficit as a percentage of overall GDP, the crucial point is that if we divide the percentages that I mentioned by each country’s domestic savings ratio, we find that we are actually in a far worse position than other countries, and possibly even than Japan. All that is before we consider any of the off-balance-sheet stuff. For some time we have had the problem that the UK gilt market is greatly exposed to weak domestic savings. Unless British households can start saving in a way that they have never done before, gilt issuance will depend on foreign demand. In the short term, both official and market interest rates are low at the moment, but enormous care is needed. Forward interest rates such as forward rate agreements—in other words, where the market thinks rates are headed—are much higher than short-term rates. In fact, the multiplier of long-term rates, at about eight times the level of short-term rates, may be at a record level. As I have said before from the Dispatch Box, it is worth remembering that a 0.5 per cent. increase in interest rates is far more significant when rates are low than when they are high. The market has already anticipated substantial rises in interest rates, and even before any such rises have taken effect, the Treasury itself projects that debt interest will rise from £22 billion to £67 billion per annum. Obviously that bill will rise substantially if interest rates rise significantly. That is another reason why fiscal responsibility is so important for our economic recovery. If the Government continue to borrow uncontrollably, not only will the interest rate bill rise substantially and potentially unsustainably but the public sector will crowd the private sector out of the credit market. Members of all parties rightly urge the giving of more credit to small and medium-sized enterprises, but that will be made much harder if we do not get a grip on the public finances, because the state will crowd the private sector out of the market.