No, this is not "creative accounting".

Simple question: if you remortgage at a lower interest rate, does your annual cost go down?

A: of course if does. So by definition, your annual surplus goes up (or your annual net loss goes down).

It is the same with QE. The government refinanced £350 bn of interest-bearing debt by replacing it with £350 bn* of QE money which costs it 0.5% interest.

If the government's interest costs go down**, then that reduces the deficit.

* Let us assume, for simplicity, that the £350 bn old debt was not bought redeemed at a premium i.e. £350 bn nominal of high interest debt was bought back for £375 bn or something.

** There is a good argument and plenty of evidence to show that governments don't need to pay interest at all, separate topic. But 0.5% is pretty close to zero.

It is a mystery to me why 'financial journalists' find this so difficult to understand and pretend it is more complicated than it is.

From yesterday's Evening Standard:

The Chancellor is also going to get a handy leg-up from Robert Chote’s watchdog on the public finances over the next few years — cutting his borrowing bill with the wave of a magic wand.

How so? It all comes about through the change in the OBR’s assumption about the Bank of England’s Asset Purchase Facility (APF), the vehicle in which Threadneedle Street holds the £375 billion of government bonds it bought under its money-printing programme.

"Osborne will paint this as fiscal rectitude, when he’s being rewarded for economic failure." [says] Russell Lynch.

Explaining the mechanics of this without needing to put a wet towel over your head is difficult, but here’s the gist of it.

All those bonds bought by the Bank under quantitative easing (QE) rack up “coupon” or interest payments from the Government — say of between 2% and 2.5% — most of which is now transferred back to the Treasury, after the Chancellor changed the rules a couple of years back***. But the Bank bought the bonds with the newly created QE money on which it pays interest set at Bank rate, which is just 0.5%.

Broadly, the difference between the two rates is now returned to the Treasury. The details of these arcane transactions have been relegated to supplemental fiscal tables in recent publications and this transfer —which looks like very (ahem) “creative” accounting — gets much less attention. But it has a big impact. For example, this financial year, the APF is forecast to generate £14.1 billion in coupon payments less £2 billion in interest paid out on the QE cash — £12.1 billion.

The "creative accounting" is pretending that the original bonds still exist and making two sub-departments of HM Treasury pay interest to each other, but such is life.

*** Not clear how the rules would ever have been any different. Governments pay interest on their bonds. The holder of the bonds receive the interest. If the UK government holds German bonds, the German government pays the UK government interest. If the UK government holds UK government bonds, it pays itself interest i.e. nothing happens.