There was an interesting announcement yesterday by the Chancellor saying that excess cash held by the Bank of England’s Asset Purchase Facility will be transferred to the Exchequer.
It’s widely known that the BoE has been purchasing UK government bonds on the secondary markets via QE. To date it has bought £375bn worth. What is less known is that the Government has been paying the Bank of England interest on these bonds – around £35bn so far. Blogger Neil Wilson has written about this previously here, which Think Left drew attention to here.
These interest payments will now be returned to the Treasury on a quarterly basis, so in effect, the bonds held by the Bank of England will now be interest-free. Previously, we have been issuing more debt than we needed to in order to pay interest to the Bank of England, which was actually money the Treasury was entitled to. If it sounds crazy, it is.
George Osborne argues this change just brings the UK into line with the practice in Japan and the US. This is true in that the US Treasury regularly ‘sweeps’ the accounts of the Federal Reserve to return any profits it makes to the Treasury, but it represents something of a volte face and the timing is interesting. A while ago, I put a question to the Treasury about this via my MP and was told that profits from QE would not be returned to the Treasury until QE was ‘wound-up’. They were not able to say when they expected this to be. I had suspected Osborne was saving this up for some pre-election tax cuts, but desperation seems to have set in.
So what does this mean in practical terms? The timing is interesting, coming as it does just a couple of weeks before the Autumn statement, when the OBR was expected to announce that Osborne would miss his debt and deficit targets. As Duncan Weldon argues, this change could mean that Osborne could now remain on course. The payments from the BoE will mean the deficit will be lower than it otherwise would, and it looks like Osborne will not use this money to increase spending, but instead to reduce the amount he borrows externally. This appears to be a purely political move though, as good economics would say this money would be better spent on capital projects, direct job creation, or tax cuts for low earners.
There is a complicating factor here however, in that the Treasury ‘indemnifies’ the Asset Purchase Facility, meaning that if the BoE makes any losses when unwinding QE (if it sells bonds back to the markets for less than it paid for them), then the Treasury would have to cover the losses. So while this may be a short term (political) benefit to Osborne, in the longer term, it may actually end up costing the Treasury more. In reality though, I think it unlikely that QE will be unwound any time soon (in the next five years at least).
If all this sounds confusing, don’t worry, it is. Making the Bank of England a separate entity from the government means that it looks like the debt is a lot higher than it actually is. Officially, the national debt is over £1 trillion, but if the Bank of England consolidated its balance sheet with HM Treasury under the rules in IFRS-10 (h/t Neil Wilson again), the debt goes down to around £700m.
A lot of commentators reacted to the news quite hysterically by announcing that the Government had finally lost the plot and resorted to ‘printing money’ again. Jeremy Warner in the Telegraph was one of the first here (although he later rowed back somewhat). This is not what is happening though, and we are just bringing ourselves into line with the US and Japan, although as I said, the timing is interesting.
I’ve argued before that a lot of the hysteria about government debt is irrational. As the government issues sterling, it can never run out of money, neither does it need to tax or borrow in order to finance it’s spending. This latest announcement is just another reminder that much of ‘the debt’ is not really debt at all and certainly isn’t a burden on future generations.