MNI INTERVIEW: UK Debt Target Easier To Hit If BOE Included

Re-including the Bank of England’s net assets in public debt figures would bump up total public sector liabilities but make it easier for the UK government to show debt-to-GDP on a declining path within its five-year forecast horizon, external adviser on public finances to the Institute of Chartered Accountants In England and Wales Martin Wheatcroft told MNI.

Scheduled repayment of GBP192 billlion in cheap BOE loans under its Term Funding Scheme will allow a substantial boost to the public finances if new Chancellor Jeremy Hunt chooses to include the BOE in his debt measure in his Autumn statement on Thursday, a practice which had been discontinued in recent years, Wheatcroft said in an interview.

"As these loans are repaid, the cash will be used to reduce central bank deposit liabilities, resulting in a decrease in public sector net debt of an equivalent amount in the fiscal numbers," Wheatcroft said.

Former Chancellor Phillip Hammond, whose term ended in 2019, "used this effect to massage the numbers," he noted, but his successors were persuaded to exclude it. Hunt is expected to unveil new fiscal rules, including a debt-to-GDP goal, and Wheatcroft pointed out that it is standard practice for central bank liabilities to be included in ational accounts.

"What they have done is they have replaced a measure they used in the fiscal target with a non-standard measure .. If I was a Chancellor I could legitimately say 'I just want to use the official measure' and the official measure is the Philip Hammond measure," Wheatcroft said.

UNCERTAINTY OVER GILT SALES

The flipside for the Treasury is that by including the Bank it would also have to factor in unpredictable book losses on the BOE's sales of gilts under quantitative tightening. Sales only started a couple of weeks ago but losses are already mounting. (See MNI INSIGHT: BOE's QT Pace Known, Terminal Point Unknowable)

So far, for fiscal accounting purposes, the BOE has "lost GBP280 million in the last two weeks. It is just an accounting difference." Wheatcroft said.

The proceeds of the initial sales have been GBP1,521m for gilt with a nominal value of GBP1.801 billion, resulting in an increase in public sector net debt of GBP280 million. With the Bank committed to selling some GBP10 billion worth of gilts a quarter they are looking at a loss of about six billion a year on a pro-rata basis, Wheatcroft noted, with the Treasury issuing the corresponding amount of fresh debt to indemnify the Bank.

He said that he could understand why on these grounds Treasury officials may push back against including the Bank in target measures, "because the numbers could swing all over the place."

By excluding the BoE "you are more predictable. You don't get the benefit of the TFS unwind but you avoid the unpredictability over what prices the Bank of England actually gets" for gilt sales, he said.