§ Mr. Rookerasked the Chancellor of the Exchequer under what circumstances local authority borrowing adds to the money supply; and what is the current extent of such circumstances.
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§ Mr. Ian StewartLocal authority borrowing adds to sterling M3 when financed in such a way as to lead to the creation of private sector sterling bank deposits. When such borrowing is funded, directly or indirectly, by sales of public sector debt to the non-bank private sector, it does not add to the money supply. In the first eight months of 1984–85, net local authority borrowing was some ¾ billion. Sales of gilt-edged are not hypothecated to local authority borrowing. However, it is not possible to estimate the effect on the money supply of that borrowing. Of course local authority borrowing increases the total amount of funding required to maintain monetary control, adding to demands placed on the capital market and therefore tending to raise interest rates above what they would otherwise be.