Source · Select Committees · Public Accounts Committee
Recommendation 16
16
Deferred
Government gilt redemptions peaking in 2024-25, challenging DMO's cash management function.
Conclusion
Not only does the government face growing pressure to borrow more in the future, but it also needs to ensure it can repay its current debts. The DMO issues gilts of varying length, ranging from one to more than 50 years. The period between a gilt being first issued and when the amount borrowed must be repaid to the original investor is called the redemption or maturity date. The NAO’s report highlighted that government gilt redemptions will peak in 2024–25, with £140 billion of gilts maturing.27 The DMO told us that some of the very short-dated gilts issued in 2020–21 during the pandemic were now starting to mature. The DMO also told us that the peak redemptions in 2024–25 will create a challenge for its “cash management function” in terms of needing to make sure that on any given redemption date, sufficient funds are available to repay the gilts. Close to a redemption, the DMO explained it will typically schedule an auction, thereby repaying maturing gilts by selling new ones. The DMO added that while the UK had a large number of redemptions to manage in the years to come, the amount was “much less” than some other major European countries.28
Government Response Summary
The government agrees with the implicit recommendation to improve performance measurement. It commits to examining international best practice and assessing quantitative and qualitative measures by Spring 2025, and will write to the Committee upon conclusion of this analysis.
Government Response
Deferred
HM Government
Deferred
1.1 The government agrees with the Committee’s recommendation. Target implementation date: Spring 2025 1.2 To better improve performance measurement against the debt management objective, the government will look to examine international best practice and what it can apply from other countries. Alongside this, it plans to thoroughly assess any prospective quantitative and qualitative measures it could consider, and how it can systematically report performance further in the future. 1.3 Currently, the government closely monitors the UK’s debt portfolio and reports on it in the annual Debt Management Report (DMR), which was last published in March 2024. A detailed assessment of the costs and risks associated with debt issuance in 2024-25 (including yields and risk premia, demand from investors, and various risks – such as inflation and refinancing risk) is set out in Annex B of this publication. 1.4 The Debt Management Office (DMO) also reports on its performance against its objectives and operational targets in its Annual Report and Accounts, whilst National Savings & Investments (NS&I) report on performance against its Service Delivery Measures (SDMs) in its Annual Reports and Accounts. The Economic Secretary sets targets for SDMs, which are also published annually. 1.5 Making decisions on borrowing involves balancing a range of cost and risk considerations. The International Monetary Fund (IMF) Public Debt Management Network’s 2014 Revised Guidelines for Public Debt Management sets out the key features that are essential for optimal debt management, all of which are in the line with the UK’s approach. 1.6 Since the National Audit Office (NAO) published its report, the government has developed further its evidence base to assess performance after having welcomed its recommendations. The following analyses have been conducted and published: • Analysis conducted by the DMO on the value of issuing index-linked gilts over time, demonstrated that, for index-linked gilts that had matured since their introduction in 1981 but prior to August 2023, the government had generated direct savings of around £77 billion in total from the issuance of index-linked gilts if valued at maturity, or £158 billion in 2023 terms. • HM Treasury (HMT) furthered its analysis of the UK’s exposure to refinancing risk (published in the DMR annually), to account for the impacts of quantitative easing (QE). This demonstrated that the average effective maturity of the UK’s debt stock remains longer than peers even after accounting for QE (at 11 years), leaving it relatively more insulated from interest rate rises. 1.7 Regarding retail financing, HMT and NS&I routinely use the ‘Value Indicator’ (VI) in setting NS&I’s annual Net Financing target and rates on products, monitoring how it evolves throughout the year. Alongside this, in 2024-25 NS&I will utilise additional measures of cost effectiveness of raising finance to sit alongside the VI. More broadly, NS&I’s SDMs include an ‘efficient administration of funds ratio’ that measures the costs of managing each £100 of funds held. For 2023-24, NS&I is forecasting to achieve the SDM with a figure of 6.8p (beneath a target of 7.2p). 1.8 The challenges around providing a definitive metric to measure performance against a qualitative objective are recognised in the NAO’s report and across international issuers. For example, in the US, its quarterly refunding reports concentrates on financing needs and recommended issuance skews but does not attempt to quantify past performance – in a similar vein to the UK’s annual DMR. In France, the Agence France Trésor publishes an annual report, which contains qualitative analysis on its performance against the debt management objective over the past year – the form and content of the report is similar in nature to the UK DMO’s quarterly reviews. 1.9 Despite these challenges, the government recognises the need to continually review and improve on how it manages the costs and risks associated with debt management. It will therefore seek to continue improving its evidence base in the coming months, including through examining international best practice, and how it can systematically report performance further in the future (as set out fully above). 1.10 The government will write to the Committee when this analysis is concluded.