Gilt sale now on!

By Stephen Lansdown | 28 Aug, 2008 

Well not quite, but I was fascinated to see in the weekend press the headline that the Government would have to issue a hundred billion pounds worth of Government stock (Gilts) during 2009.
 
This is indeed a sign of the times. Over the past 15 years with the economy booming the Government has been able to use the revenue from taxation to fund its public spending. However, now the economy has slowed to zero growth it means that stamp duty on house sales has disappeared, corporation tax returns are falling, national insurance on employment will reduce as the unemployment figure rises and VAT will fall as retail sales plummet. It is therefore inevitable that the Government spending plans will have to be curtailed and in order to try and keep the economy going and perhaps bail out more companies, such as Northern Rock, the Government has to borrow and borrow big.
 
Therefore there will inevitably be an over supply of gilts in the market place which will not help returns from this sector, and with an enormous amount of cash being directed towards UK Government stocks, there could be less money to invest into equities which may have a negative effect on stock markets too.
 
If there is any good news to come from this it is the fact that action is being taken to try and resolve the problem even if it is by incurring more debt. The UK Government is however one of two countries which has never welched on its debt (the US being the other) so from that perspective lending to the UK Government is as safe as you can possibly get it.
 
Hopefully this is the beginning of the end but it could be a long and painful process.