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Treasury chiefs eye 100-year loan option

By Andrew Woodcock

The Treasury is planning to take advantage of Britain's historically low interest rates by taking out loans which will not be repaid for 100 years or more.

Chancellor George Osborne will use next week's Budget to launch a consultation on plans to issue “super-long” gilts which do not have to be paid off for many decades — or even perpetual gilts, on which the capital is never repaid, but interest continues to be charged forever.

The move would mean that children not yet born will continue to pay interest throughout their lives on debts racked up during the financial crisis of 2008/09.

But the Chancellor believes it will benefit future generations by “locking in” low interest rates on a proportion of the UK's national debt, reducing refinancing costs and insulating the economy from some of the risk of future market instability.

Britain last issued perpetual gilts at the end of the First World War, rolling over some of the war debt incurred during hostilities. These debts — as well as some issued to pay for the 18th century South Sea Bubble — are still held by the Treasury, but inflation has reduced them to negligible significance over the decades.

The UK already issues long-term bonds of up to 50 years — double the length of those of many other European states.

The option of loans with an even longer maturity is attractive to the Treasury because Britain's “safe haven” status during the current financial turmoil has brought gilt yields down as low as 2%, making borrowing cheaper than it has been for a century.

A Treasury source said: “This is about locking in for the future the tangible benefits of the safe haven status we have.

“The prize is lower debt interest payments for taxpayers for decades to come. It is a chance for our great-grandchildren to pay less than they could otherwise have expected to.”

The independent Office for Budget Responsibility is expected to release figures next week indicating that a rise of just 1% in gilt yields would increase the burden on the taxpayer of financing the UK's debt by a total of £20bn over the years to 2016/17.

The super-long gilt plan is an unexpected feature of a March 21 Budget still being finalised.

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