“Because of lower market interest rates we have secured for Britain debt interest payments are forecast to be £22bn less than predicted,” said George Osborne yesterday – a “safe haven dividend”.

There are two key claims here – that low rates do save £22bn; and his policies secured those low rates.

Firstly, the level of saving.

The Office for Budget Responsibility (OBR) predicted savings from low rates will amount to £22.2bn over the next five years, as Osborne said.

However, it also noted that there are costs in terms of tax revenue associated with low interest rates.

Savers will receive lower interest payments and so pay less tax on that income, for example. The state holds assets, too, which will face declining returns, lowering its income.

In fact, those losses in revenue amount to £24.8bn by 2016, giving the exchequer a net loss of £2.6bn.

A bad start.

The Treasury told City A.M. the figures are not directly comparable, and losses may be slightly lower.

And did Osborne’s policies actually achieve those low rates?

He claims his deficit reduction strategy instilled confidence in the markets, and he showed yesterday that he would protect it, adjusting spending to keep on track to wipe out new borrowing by 2015.

This has certainly had an impact – “if political commitment to the deficit reduction plan were to waver, gilts would be vulnerable,” said Barclays Capital’s Simon Hayes.

The international situation has had an impact, though – investors will flock to a large economy which is just slightly less troubled.

Further, quantitative easing has created something of a false market in gilts.


Osborne is right to say he has kept rates low through his slow-but-steady fiscal policy. However, interest rates have wide ranging effects, so his savings just won’t appear.