The following is a blog by Neil Wilson, who has agreed I may share it.
What it shows is that despite the Treasury taking all the risk on quantitative easing it is refusing to take the income back into the Treasury coffers even though it could at any time. The result is that the government is artificially inflating the apparent cost of borrowing in its accounts as an excuse for imposing cuts on the UK economy. That's something called fraud, I think. And it's one that has to stop.
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As you teach any child it is good to save for a rainy day. The UK Chancellor of the Exchequer appears to have taken that advice to heart and has a nice fat piggy bank set aside.
The question is: how much more rainy does it have to get before he spends it?
The fund in question is the cash account at the Bank of England Asset Purchase Facility Ltd, and on the current cash flow accounts there is £31,324m due to HM Treasury. Yes, you read that right. That's £31bn sat there doing nothing in an economy with negative GDP growth.
I first drew attention to this account in 2011 when it became clear to me that the Asset Purchase mechanism was slowly unwinding. That is when I discovered that the UK's version of Quantitative Easing, unlike any other QE system in the world, doesn't automatically sweep the interest paid on the government bonds back to the Treasury.
The evidence is in the accounts of the asset purchase fund company, where on the Cash flow statement on pp 6 you will see the line:
Due to HM Treasury £31,274m
which is an increase of nearly £20bn over the previous year.
(Note 10 to the accounts on pp9 states what is due to HM Treasury under the indemnity the company has from HM Treasury. The difference in values is due to the imputed 'profit' the company would get if it sold all its Gilts. The price of them has gone up since the start of the Asset Purchase process - which of course has reduced the wealth of the private sector by that £10bn. So much for the 'wealth effect').
This is corroborated by the entry in the Bank of England Accounts, pp 94 where it states:
The financial statements of BEAPFF have not been consolidated as the Bank has no economic interest in its activities. BEAPFF's operations are fully indemnified for loss by HM Treasury and any surplus for these operations is due to HM Treasury. [...]
At the year end BEAPFF held a deposit at the Bank of £20.7 billion (2011: £11.8 billion), which is included in other deposits (note 22). Interest on this deposit is payable at Bank Rate and totalled £85 million for the year ending 29 February 2012 (2011: £44 million).
This money needs spending urgently - either by direct government spending or by giving it back to the population so they can spend it. Holding it back is madness.
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The truth about this is that is really doesn’t matter with regards to the government policy: they have borrowing rates lower than under Thatcher, Churchill, Baldwin, and they think it a triumph that overshadows their double-dip which is worse than that in the Eurozone.
Stefan Collini described political economy in the mid-19th century as attracting those who liked “individualism, stoicism, Spartan living, vigorous exercise, [and had] a dislike of intellectuals and intellectual complications.” These are the values that draw people into Plan A, as they were drawn into early 1980’s MTFS unemployment – putting away those champagne glasses at conferences is a nod to the Spartan I suppose.
I’m confused by ‘Due to HM Treasury £31,274m
which is an increase of nearly £20bn over the previous year.’
Does Neil mean ‘Due to HM Treasury £31,274bn’ ?
I wonder what tax cuts/inducements the ‘nest-egg’ might be intended to create in the run-up to an election? This is a huge scandal.
The scandal is that the free (tory) press also know this.
While it is possible that it may generate a lot of vote-buying for the election, it may also be used to enrich the rich further.
My thoughts entirely: all there to try to buy the next election. Its been a succesful strategy in the past.
At the next PMQ (which is some way, away, I know) Miliband needs to make this the first subject that he questions Cameron about.
Richard,
The sums are indeed significant, but they are a contingent asset from the perspective of HMT. The £31bn represent the difference between the amount the Bank of England Asset Purchase Facility paid for the Gilts it has purchased, and the current market price (essentially a holding gain) were it to sell them again.
This only crystallises if the Gilts are sold again. If gilt prices change, this number could change. In extremis, were gilt prices to fall sharply (i.e. gilt yields to rise sharply), under the agreement the Bank could be owed money from HMT under the agreement (as HMT has agreed to indemnify the Bank of England against any losses on the gilts it purchases) – though I accept this is pretty unlikely to occur.
Interestingly, if BEAPFF simply holds the gilts it has bought to maturity, no sums are payable in either direction.
You are ignoring the fact that interest is paid
Dearie me… wasn’t Chancellor Osborne the chap who only back in February was assuring all and sundry the UK has run out of money? The reality, as is rapidly becoming apparent, was different by an order of tens of billions of pounds. That doesn’t look like we’re skint, that looks like we’re quids in to me. How is he to be held to account for this outright and pernicious misrepresenation of the facts, his party along with him, and their supporters in government (the LibDems) too?
Interest issues aside, is not the effect of QE to reduce the government debt (but not the deficit)? If so, it is no wonder QE is being repeated despite it having very little effect on real economic activity.
No – purpose is to provide liquidity that banks are not injecting into economy
It so happens it reduces debt
“No — purpose is to provide liquidity that banks are not injecting into economy”
Increased bank lending is only a secondary stimulation effect of QE and one the bank admits “would not be expected to be material during times of
financial crisis.” If you really wanted to stimulate bank lending, you would buy the illiquid assets off the banks balance sheets, freeing up funding for lending. QE mostly purchased non bank owned gilts to encourage investment in riskier assets and drive the prices up.
It would be interesting to learn the official explanation why BEAPFF is used in this way and why, as with FSA, it has been set up as a private limited company. What particular advantages does this structure confer, and to whom?
[…] What it shows is that despite the Treasury taking all the risk on quantitative easing it is refusing to take the income back into the Treasury coffers even though it could at any time. The result is that the government is artificially inflating the apparent cost of borrowing in its accounts as an excuse for imposing cuts on the UK economy. That’s something called fraud, I think. And it’s one that has to stop. (6) […]