Source · Select Committees · Public Accounts Committee
Recommendation 12
12
Accepted
Government borrowed vast sums during pandemic, DMO successfully met significantly increased remit.
Conclusion
Government borrowed vast amounts during both the financial crisis and the COVID-19 pandemic. The Treasury, on behalf of government, required the DMO to raise £486 billion during the pandemic, triple the original remit for 2020–21, while NS&I had a record target of £35 billion, revised upwards from £6 billion. The DMO met its remit, raising £486 billion from gilt sales while NS&I raised £23.8 billion which was below its remit target but higher than its previous peak of £18.2 billion in 2014–15. The DMO successfully raised the amount requested by government at a time when the Bank of England was operating its quantitative easing (QE) programme. The Bank of England initiated the QE programme in 2009 with the aim of lowering interest rates, encouraging spending in the economy and meeting the Monetary Policy Committee’s (MPC’s) inflation target. To do this, the Bank of England, through a specially created subsidiary called the Asset Purchase Facility (APF), bought large volumes of government gilts, not directly from the DMO but rather from investors in the secondary market. The DMO sells gilts directly to its primary dealers, known as Gilt-Edged Market Makers (GEMMs), who hold these gilts before selling them in the secondary market. At its peak, at the end of December 2021, the Bank of England held £894 billion in government gilts.19
Government Response Summary
The government states the recommendation is implemented, detailing how it has captured lessons learned from previous crises, established a Professionalising Crisis Management project, and committed to learning from the pandemic response. It also notes NS&I's transformation programme will improve systems scalability.
Government Response
Accepted
HM Government
Accepted
5.1 The government agrees with the Committee’s recommendation. Recommendation implemented 5.2 Previous crisis episodes placed extraordinary demands on the government and capturing lessons learned have helped to improve its preparedness. 5.3 Following the Review of HM Treasury's management response to the financial crisis, the Professionalising Crisis Management project was established to ensure the department is ready to effectively respond to future financial stability events. It has expanded considerably since, and the department has developed a suite of manuals and resources to support the deployment of tools in crises. 5.4 More recently, the COVID-19 pandemic posed an unprecedented challenge that required the government to revise its financing requirement outside of the normal cycle. As discussed in the government's response to recommendation 4b of the Committee's Ninth Report of Session 2023-24, HMT remains committed to learning and sharing lessons from the response to the pandemic. In respect to borrowing, HMT has since agreed with the Office for Budget Responsibility (OBR) that it will consult the OBR on any future out-of-cycle internal fiscal projections (that, for example, might be used to inform a DMO financing update). In light of market challenges at the time, there was also an increase in the planned DMO end-financial year net cash position, to provide additional day-to-day liquidity. 5.5 Generally, setting the DMO’s remit each year involves taking into account the market’s feedback to design a programme that best meets the debt management objective. This serves as an annual lessons learned process, which remained robust during the pandemic. 5.6 NS&I’s funding target was also increased materially at the time. NS&I met this by maintaining high rates on easy access variable products, which led to very high demand for their products and services. When these rates fell, customers moved quickly to withdraw funds creating further operational pressures, which, regrettably, negatively impacted customers experiences and public trust in NS&I. 5.7 The operational pressures from both high inflows and subsequent outflows were exacerbated by NS&I’s older systems. NS&I’s transformation programme will deliver the systems scalability needed to meet sudden spikes in demand and the robustness customer ‘journeys’ that enable customers to complete these online without further support.