Source · Select Committees · Treasury Committee
Recommendation 22
22
Rejected
Examine inclusion of indemnity payments in fiscal rules debt and revisit QE/QT accounting
Recommendation
The Treasury should examine whether it is appropriate that ongoing indemnity payments are included in the debt targeted by the fiscal rules, subject to maintaining the credibility of the UK’s macroeconomic framework. For any future rounds of QT, the Treasury and Bank should commit to revisiting whether it would be possible and appropriate to account for profits and losses in a way analogous to the deferred or derivate asset approach being employed in the US and elsewhere. In particular, the 2012 decision to remit cashflows quarterly between the Bank and the Treasury should be reconsidered, should future QE generate profits. (Paragraph 92) 38 Quantitative Tightening
Government Response Summary
The government rejects the recommendation to exclude indemnity payments from fiscal rules, stating substantial fiscal costs should not be ignored. It also explains that a deferred asset approach for accounting profits and losses is not feasible due to the UK's unique arrangements but commits to keeping its approach to managing cashflows under review for any future QE.
Government Response
Rejected
HM Government
Rejected
The Committee recommended that HM Treasury and the Bank review whether it is appropriate that indemnity payments are included in the debt metric targeted by the fiscal rules. Sustainable public finances provide the foundations for long-term growth, and the government remains committed to reducing debt. The current rules require public sector net debt excluding the Bank of England to be falling and borrowing to be below 3% of GDP, both in the fifth year of the rolling forecast period. Fiscal rules are designed and managed by the Treasury and are not a matter for the Bank of England. In achieving the best measure of fiscal sustainability, it is the government’s position that substantial fiscal costs should not be excluded from the debt metric target. Realised losses on sales and the net interest costs arising from the APF are real fiscal impacts for the public sector as a whole. Regardless of how specific cashflows between the Treasury and the Bank are arranged, ignoring such costs would mean targeting fiscal metrics that do not reflect a comprehensive assessment of the public sector’s fiscal position. The Committee also asked about alternative accounting approaches for recording gains and losses from QE, as well as the 2012 decision to remit cashflows on a quarterly basis. While the Federal Reserve in the US records losses from QE as a deferred asset on its balance sheet, this reflects the specific financial and institutional set up of the US central bank. The Treasury’s indemnity of the APF is in line with the MoU on the financial relationship between the Treasury and the Bank of England. The advantages of this set up were outlined by HM Treasury at the Autumn Statement 2023 in Box 1.E, and are in line with best practice as set out in a recent IMF working paper relating to several areas of governance, accountability and transparency. Excess cash from asset purchases between 2009 and 2012 initially accrued in the APF. When it became clear that asset purchases under QE were likely to be held for longer and at a larger scale than initially envisaged, the government decided to normalise the cash management arrangements such that any excess cash would be transferred to the Treasury on a quarterly basis. The cash transfers from the APF to the Treasury that took place until 2022 helped reduce the government’s cash requirement and the amount of gilts that would need to be issued by the DMO, therefore reducing the government’s future debt interest costs and supporting the overall position of the public finances. Had the initial arrangement remained in place, the excess cash held in the APF would have received interest at Bank Rate, which was close to zero between 2009 and 2021. The Treasury will of course keep under review its approach to best manage cashflows and consider any lessons learned in the future should QE be deployed again. QE/QT operations give rise to a set of cashflows between the APF and HMT. These are flows within the public sector accounts. The UK arrangements have the benefit of being fully transparent. Hence, the Bank has been fully transparent about cashflows to and from the APF and presents a set of projections in the APF Quarterly Reports. Changing the accounting treatment would not alter the underlying public sector impacts of QE or QT. Additionally, a deferred asset approach would not be feasible given that it requires a future income stream to offset any negative cashflows–and a unique feature of the UK arrangements is that all seigniorage income (net of some costs) is paid to HMT. That is one reason why the indemnity exists, in line with the Memorandum of Understanding on the financial relationship between the Treasury and the Bank of England.