MNI INTERVIEW: Replacing RPI Will Save UK Money: OBR's Bean

--OBR Assessment Finds Net Fiscal Boost From Ending Linkage To RPI For Gilts,

Others

By David Robinson

     LONDON (MNI) - The UK government could save money if it acted on delayed

deliberations over switching its inflation-linked gilts and other prices away

from the discredited retail price index, top Office for Budget Responsibility

official Sir Charles Bean told MNI.

     Expectations of a prompt move to replace RPI with a consumer prices measure

were dashed in April when the government, its attention increasingly drawn

elsewhere as Brexit sowed political turmoil, failed to keep a promise to respond

by the end of April to a report on the matter by the House of Lords Economic

Affairs Committee.

     Officials had indicated that they might be reluctant to abandon RPI if such

a move would be expensive, despite the fact that the index's methodological

flaws mean it systematically overstates inflation. RPI has run an average 0.7

percentage point higher than the consumer price index in recent years, and while

dropping the gauge might save the Treasury money paid in interest to investors

in inflation-linked bonds, it could cut returns from other items tracking the

index, such as student loans and excise duties.

     But Bean said in an interview that this would not be the case. Debt

interest payments on index-linked gilts in the 2019-20 fiscal year alone would

be stg3.1 billion lower if RPI were replaced by a consumer price measure, with

savings rising to stg4.4 billion in 2023-24, according to the OBR's Fiscal Risks

report. After factoring in revenue losses from excise duties and interest on

student loans, the OBR still found that that net effect would be positive, with

borrowing lowered by stg2.3 billion in 2020-21.

     The risk that such a switch might undermine confidence among investors in

UK government debt may also be overstated, Bean said.

     "One of the issues that we do note is that there is a bit of a risk that if

you change the reference of the index .. that it might be deemed a breach of

faith by investors so it might undermine market confidence," he said. "Now,

personally, I don't think that is particularly likely because this doesn't look

like something where the government has chosen ... to pull a fast one."

     Investors would understand that RPI had been a fundamentally flawed way of

calculating price changes, he added, noting that, optimally, the index would

also cease to be used for adjusting student loans and other prices. It would

also be possible to keep the RPI label and rework the way it is calculated to

bring it into line with CPI.

     With pension funds having extensive RPI-based liabilities, the demand for

RPI linkers has been strong. The share of UK debt in inflation-linked bonds is

far larger than in other advanced economies, at around double the next largest,

and the total pool is now equivalent to close to 20% of GDP.

     The official statisticians have done their job in setting out the technical

shortcomings of RPI, Bean said: "To me it really puts the ball in the

Chancellor's court, the government's court more generally."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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