New government bonds would lock in current low borrowing rates for extended length of 100 years or into perpetuity
George Osborne is to exploit Britain's historically low borrowing rates by making plans to issue "perpetual" government bonds which will never have to be repaid.
In an unprecedented move in the modern era, the chancellor will unveil plans in the budget to relieve the debt burden on future generations by extending the length of bonds to 100 years or into perpetuity.
Lengthening the period of bonds will make it cheaper to pay down debt in the long term because the government would lock in today's low borrowing rates. Average 10-year gilt yields stand at 2%, the lowest borrowing level since the 19th century.
Osborne is to ask the government's Debt Management Office to commission a study into extending the length of government bonds, which are traditionally longer than those on the continent and in the US. The chancellor will hail the move as a sign of the safe haven he created in Britain after markets were reassured by the deficit reduction plan he announced in his first budget in June 2010. Osborne pledged to eliminate Britain's structural deficit by 2015-16 and to ensure that government debt is falling as a proportion of GDP by 2014-15.
A Treasury source said: "This is about locking in for the future the tangible benefits of the safe haven status we have today. The prize is lower debt interest payments for decades to come. It is a chance for our own great grandchildren to pay less than they would otherwise have to do because of this government's credibility."
Britain last issued perpetual gilts in the aftermath of the first world war. These are still being paid at a rate of 3%, which makes it cheaper to carry on paying the loan than pay off the whole debt.
The debts incurred by the exchequer in the 18th century South Sea Bubble were transferred into perpetual bonds in the following century. They have since been paid off.
Labour is likely to say that Osborne's decision to resort to such long-term bonds is a sign of the parlous state of the public finances which, according to the shadow chancellor Ed Balls, has been worsened by Osborne. Balls says Osborne is having to borrow £158bn more than the chancellor had planned to borrow to cover extra public spending incurred during the slow recovery.
Balls says that Osborne's rapid deficit reduction plan, which involved a 2.5% increase in VAT, sucked demand out of the economy.
Treasury sources said that Osborne's budget announcement will show that Britain is benefiting from low borrowing costs which were made possible by the coalition's deficit reduction plan. They said that any government would face record levels of debt.
Osborne will also trumpet new figures which will show that Britain is saving billions of pounds in borrowing costs. The Office for Budget Responsibility will say that a 1% increase in gilt rates would add £20bn to borrowing costs between now and 2017.
Treasury sources joked that the Liberal Democrats have prompted budget speculation by talking openly about their demands. The government's most senior ministers in the "quad" – David Cameron, Osborne, Nick Clegg and Danny Alexander – failed to reach agreement when they met on Monday.
The quad members are due to have another discussion on Friday, the deadline for passing data to the Office for Budget Responsibility that has an impact on spending. They are also due to meet on Monday. One Treasury source said: "The budget is still moving around."
Meanwhile, the Lib Dems are continuing to press for more rapid moves towards raising the tax allowance to £10,000 to exempt lower earners from paying tax altogether. David Cameron and Osborne are sympathetic to the demands, though they are insisting that any changes will have to be paid for. There are minor tensions between Cameron and Osborne over the chancellor's plans to remove child benefit from any household with at least one higher rate taxpayer. The prime minister wants the chancellor to ensure there is less of a "cliff edge" for those earning just over the 40% threshold of £42,750.