A record sell-off of UK government debt by overseas investors is fuelling City anxieties over the Treasury’s ability to fund soaring public borrowing that is set to top £150 billion over this year and next.

The surge in foreign selling of gilt-edged bonds and short-term UK Treasury bills is also reinforcing growing fears over the effectiveness of the Bank of England’s controversial quantitative easing (QE) scheme to pump newly created money through the economy.

Bank of England figures released on Monday highlighted record overseas sales of UK government debt during the three months from March to May.

Foreign investors dumped a total of £22 billion in their holdings of UK gilts and Treasury bills, mainly selling these to the Bank itself, through its QE scheme.

In May alone, foreign institutions sold £3 billion in Treasury bills and £900 million in gilts. In March there were record net overseas disposals of gilts worth £7 billion; in April, selling reached a record £10.9 billion.

With the Bank expected to wind up its huge purchases of gilts under QE in the next few months, some economists fear that, without this vast £125 billion asset-buying drive, the scale of foreign dumping of government debt signals that the Treasury might struggle to meet its future funding needs through finding enough buyers for fresh gilt issues.

Michael Saunders, of Citigroup, said that the Treasury could be forced to make gilts appear better value by paying out more in interest to “tempt back foreign investors, without whom the funding arithmetic looks impossible to meet”. He added: “The gap left by foreign net sales of UK public sector debt is being filled at present by the Bank of England. But the Bank’s gilt-buying programme is likely to end soon.”

Those concerns come as the Organisation for Economic Co-operation and Development called yesterday for “more explicit” spending cuts and tax increases to curb Britain’s vast budget deficit, which it expects to reach 14 per cent of GDP in 2010-11. That implies £30 billion more borrowing than Alistair Darling, the Chancellor, has already factored into Treasury forecasts.

Mr Saunders and other analysts also believe that, with foreign investors exploiting the Bank’s asset-buying under QE as an easy route to sell part of their gilt holdings, this, in turn, is undermining the effectiveness of the radical measures that are aimed at jump-starting the economy.

The Bank’s intention is that the newly created money it uses to buy up assets under the QE plan should flow into the economy through various channels, yet much of the beneficial effects may be lost if the funds flow overseas, instead.

The Bank insists that this damage is offset, since the flow of funds abroad weakens the pound, giving a boost to British competitiveness. Analysts think that QE’s impact is undercut.

Mr Saunders argued: “The effectiveness of QE in lifting core money growth surely has been diluted to a considerable extent by the heavy bias [by the Bank] to buying gilts off foreign investors, and UK banks, rather than the UK non-bank private sector.”

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