Wednesday, August 09, 2023

Labour accuses government of losing £250bn from value of UK assets

Phillip Inman
THE GUARDIAN
Wed, 9 August 2023

Photograph: Ian Forsyth/Getty Images

Labour has accused the government of “catastrophic financial mismanagement” and claimed it has “lost” £251bn from the value of assets created to rescue the banking sector after the 2008 financial crash.

The party said analysis of recently published figures showed that a decline in the value of the Bank of England’s assets – over which the Treasury acts as a guarantor – was a huge loss to taxpayers, “equivalent to 10% of gross domestic product (GDP) in 2022, or the entire GDP of Scotland and Wales combined”.

In a report assessing the impact on the exchequer, Labour said the problem began when Rishi Sunak was chancellor in 2020 and worsened in the aftermath of former chancellor Kwasi Kwarteng’s disastrous mini-budget in September last year.

Labour said the figures were “slipped out” last month in the Treasury’s annual accounts for 2022/23, “one of 108 ‘transparency’ publications issued by the government on 20 July to coincide with the start of the parliamentary recess and the three by-elections held on that day”.

Last year, in the aftermath of Kwarteng’s budget, investors spooked by the prospect of unfunded tax cuts, sold UK government bonds, sending their value plummeting and the interest payable to the highest level since 2008.

Labour’s calculation is based on accounting rules used by public companies that judge the value of assets in the Bank’s £804bn Asset Purchase Facility (APF) based on how much they are worth on a particular day.

Related: Bank of England poised to raise UK interest rates to 5.25%

Rachel Reeves said that bonds purchased by the Bank as part of its quantitative easing programme were a benefit to the Treasury in 2019, making it an asset worth £76.8bn. That was before a sharp reversal by April this year that transformed it into a £177.6bn liability.

“This Tory bond black hole will land working people with another astronomical bill for years to come,” said the Labour shadow chancellor.

The Treasury’s independent economic forecaster, the Office for Budget Responsibility, and the National Institute of Economic & Social Research (NIESR), have warned that the government’s finances will come under increasing pressure from the sharp increase in interest rates on bonds held by the Bank.

They said the interest payments on bonds held in the APF could soar to £150bn.

“The APF now looks likely to make a loss of some £40bn this year, next year and the year after,” said the head of NIESR, Jagjit Chadha.

“While the costs of this operation must be put against the benefits of stabilising the economy after the financial crisis, the scale of these losses will constrain fiscal space for much of the rest of this decade,” he added.

Richard Murphy, professor of accounting practice at Sheffield University Management School, said the government should refuse to pay the interest on bonds held by UK banks.

Murphy calculated that UK banks held an average of £360bn on deposit with the Bank over the last two years and these deposits will benefit from recent interest rate rises that have taken the Bank’s base interest rate to 5.25%.

He said the UK should follow in the footsteps of the European Central Bank and the Bank of Japan, which only pay the headline interest rate on a proportion of bond holdings.

The UK banks could benefit from £18bn a year of the £40bn expected to be paid by the Bank, and reimbursed by the Treasury.

Murphy said: “At a time when austerity is threatened the necessity of making this payment has to be questioned.”

Earlier this year, the German Bundesbank said soaring interest rates meant it suffered a €1bn hit on repayments to bond holders.

Last week, the central bank’s executive board reduce the repayments on domestic government deposits to 0%.

Last year the Bank of England ruled out a similar move saying if the Treasury wanted to claw back interest payments to high street banks, it should impose a windfall tax.

Labour says losses to Treasury bond fund costing £8,900 for every UK household


Martina Bet, PA Political Staff
Wed, 9 August 2023 

A Treasury bond fund has careened from an asset to a liability, with losses so profound that each UK household now faces a staggering burden of £8,900, Labour has said.

Figures show the Treasury fund, originally devised to capitalise on the Bank of England’s quantitative easing programme, has been rapidly eroding over the past three years.

According to Labour, the fund’s decline turned it into the most substantial liability on the Treasury’s balance sheet by the close of March 2023, culminating in a £251 billion loss.

The party says in terms of losses for the taxpayer, it represents a cost of £8,900 for every household in the UK and is 76 times the amount that was lost on Black Wednesday in 1992, when the UK was forced out of the Exchange Rate Mechanism.

It also claimed it is equivalent to 10% of the UK’s gross domestic product in 2022, or the entire GDP of Scotland and Wales combined.

Shadow chancellor Rachel Reeves said: “Families are already feeling the squeeze from what feels like an endless Tory cost-of-living crisis. Now they face yet another hit thanks to the Conservatives’ catastrophic mistakes in managing this fund.

“This Tory bond black hole will land working people with another astronomical bill for years to come.

“And it leaves them paying the price for the failings of successive Tory chancellors: the hubris of George Osborne thinking this fund was a one-way bet, the complacency of Rishi Sunak ignoring the warning signs in the bond market, and the recklessness of Kwasi Kwarteng turning a crisis into a disaster.

“All of them are guilty of putting their short-term political ambitions ahead of the long-term economic interests of the country.

“That will only change when we have a Labour government in place, determined to rebuild the foundations of economic responsibility, and give Britain the more secure, more resilient economy it needs.”

Labour additionally pointed out that the Treasury’s assessment of taxpayer returns over the entire fund’s existence has changed from a net profit of £128 billion by the end of March 2021 to a net loss of £58.8 billion by the end of March 2023.

Established in January 2009 as part of the Bank of England’s quantitative easing effort to aid the UK’s recovery from the global financial crisis, the Asset Purchase Facility (APF) acquired significant sums of Government bonds and other assets from banks, pension funds and finance firms, providing vital liquidity to a stagnant market.

As the economy rebounded and interest rates remained low, Government bonds regained appeal among corporate investors, leading to an increase in the Bank’s asset portfolio’s value.

In 2013, Labour noted, former Tory chancellor George Osborne revised the rules for the APF, ensuring that future profits from the Bank of England’s investments would be directed to the Treasury.

Ms Reeves, who at that point was shadow Treasury minister, warned Mr Osborne at the time that his short-term cash grab from the Bank was no substitute for a proper strategy “to create the jobs and growth we need to get the deficit down”.

The figures were published in the Treasury’s annual accounts for 2022/23 on July 20.

Treasury minister Andrew Griffith said: “The only black hole facing the British people is the £90 billion unfunded spending splurge that Labour would slap on families across the country.

“There’s a world of difference between movements in a long-term bond portfolio versus the certainty of a Labour government spending other people’s money until there is no money left.

“Meanwhile, we are making progress on the British people’s priorities – halving inflation, growing our economy and reducing debt.”

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