Government does not have clear measures in place to assess the value for money of the £2.5 trillion of borrowing, says PAC
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Government borrowing, via the Debt Management Office, has ballooned
from around £300bn in 2003 to £2.5 trillion in 2023. In a report
published today, the Public Accounts Committee (PAC) calls for
improvements to how Government tracks how well it manages debt, as
it is impossible to know whether the Government is securing value
for money from its borrowing. The Government’s debt management
objective is “to minimise, over the long term, the costs of meeting
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Government borrowing, via the Debt Management Office, has ballooned from around £300bn in 2003 to £2.5 trillion in 2023. In a report published today, the Public Accounts Committee (PAC) calls for improvements to how Government tracks how well it manages debt, as it is impossible to know whether the Government is securing value for money from its borrowing. The Government’s debt management objective is “to minimise, over the long term, the costs of meeting the government’s financing needs, taking into account risk, while ensuring that debt management policy is consistent with the aims of monetary policy”. The PAC’s report finds that the Treasury has no directly measurable success criteria to assess whether this already high-level and difficult to quantify objective is being met, meaning it is impossible to know whether it is securing value for money from its approach. The Bank of England’s (BoE) quantitative easing (QE) programme, purchasing substantial numbers of government bonds, helped the Government borrow the large amounts of money it required. The legacy of large-scale pandemic borrowing now needs to be addressed, including a repayment of £140bn in 2024-25, alongside continuing to raise large sums as part of the annual borrowing process. The report further warns that unprecedented challenges will be created by the BoE’s unwinding of QE, as for the first time the BoE and Government will be selling bonds at the same time as each other. The report identifies gaps in necessary information both to spot unlawful activity including the manipulation of Government bond auctions, and to understand the risks posed by overseas investors. There is limited information on the ultimate owners of UK debt held by overseas investors, which makes up around 25% of UK debt (the second highest in the G7) and a lack of consensus on the potential risk this creates. With a number of retirements of key and experienced staff upcoming at the DMO, and significant delays to NS&I’s modernisation programme caused by a poorly executed procurement process, the PAC is concerned about a potential skills, experience and institutional knowledge deficit, and calls on the Treasury to set out its overarching plan for building and retaining skills and experience. Dame Meg Hillier MP, Chair of the Committee, said: “When Government’s spending exceeds its income, as it has for all but a handful of years in the past half century, it must borrow. Both the Debt Management Office and NS&I, which borrow on behalf of Government, managed to successfully raise the funds needed to keep the UK functioning during the pandemic. Such borrowing was on the rise pre-pandemic, putting taxpayers on the hook for even more debt repayments and interest costs. “The Head of the DMO retires this year after over 20 years in post – leading the organisation effectively to borrow eye watering sums of money compared with 20 years ago. The loss of his experience is a risk for the organisation, especially with a number of his senior staff also approaching retirement. “It is of course essential that the best possible value is being derived for the taxpayer from borrowing. But our report finds that the means of tracking success in this regard is nebulous at best. This is the first time for seven years that the PAC has looked at government management of debt. With such huge sums being borrowed the government needs to look at how it can evaluate its performance in managing borrowing.. We look forward to hearing more in response to our report on how the Government will hold itself better accountable.” PAC report conclusions and recommendations The Treasury is not able to fully monitor performance in meeting its debt management objective owing to a lack of quantifiable measures. This objective is high-level and difficult to quantify because costs and risks need to be assessed over varying timeframes – for example, some gilts last for 50 years. This objective is therefore not directly measurable. The Treasury also does not have a set of more measurable success criteria or indicators to quantify its performance against the debt management objective. The Treasury recognises that there is no single quantitative metric to measure its performance and instead relies on more qualitative measures, such as monitoring market demand. But this means it is impossible to know whether it is securing value for money from its approach. Meanwhile, the Treasury no longer holds NS&I accountable against one of its core performance metrics, known as the ‘Value Indicator’, with a replacement yet to be introduced. The Treasury has committed to identifying how other equivalent organisations measure their performance and will assess whether the metrics currently in place can be improved. Recommendation 1: The Treasury, together with the DMO and NS&I, should set out, as part of the Treasury Minute response, how they plan to improve performance measurement against the debt management objective, including their analysis of international approaches and possible new metrics that could be introduced. We are concerned that the Treasury, DMO and NS&I will not have the necessary skills, experience, and institutional knowledge needed to overcome the challenges they face now, and in the years to come. The DMO and NS&I are both specialist organisations, with distinctly different skills sets and experience to those normally found in the Treasury. The Treasury faces challenges in maintaining the appropriate expertise in its debt management functions to be able to adequately scrutinise and challenge the work of the DMO and NS&I, which can be affected by staff turnover levels. The DMO is entering a period of transition with the current CEO due to retire at the end of June 2024 after being in post for over 20 years. This role has a long and steep learning curve and benefits from having deep, specialist knowledge which can only be developed over time. The Treasury has started the process of finding a replacement but needs to ensure a successor is willing to be in post long enough to develop this expertise. The DMO’s small executive team has other key members nearing retirement, highlighting the need for a clear succession plan. The Treasury asserts that NS&I has been upskilling and increasing the size of its workforce to reduce reliance on contractors and make it a better IT customer as it delivers its Rainbow Programme. NS&I currently outsources its entire back-office and customer-facing operations to a single service provider and the Rainbow Programme, which is already significantly delayed owing to a poorly executed procurement process, will see it move to a multiple service provider model. Recommendation 2: The Treasury should set out, as part of the Treasury Minute response, its overarching plan for building and retaining skills and experience, which should include, but not limited to, the following:
The Treasury and the DMO lack the information needed to better identify unlawful activity and understand the risks posed by overseas investors, potentially reducing the value for money from future gilt sales. In May 2023, the Competition and Markets Authority (CMA) provisionally found that, between 2009 and 2013, five major banks unlawfully shared competitively sensitive information, potentially impacting the DMO’s gilt auctions. Collusion is illegal and while it is not the DMO’s responsibility to police the behaviours of auction participants, it needs to put measures in place so it can monitor and minimise harmful behaviour, including the collection of information that could help unearth unlawful activity in a timely manner. The current measures, such as blind bids, might not be sufficient given the alleged unlawful activity took place nearly 15 years ago and was not identified at the time, with the DMO apparently unaware some of its auctions may have been manipulated. Similarly, the Treasury and the DMO hold limited information on the ultimate owners of UK debt held by overseas investors, which makes up around 25% of UK debt – the second highest in the G7. There is a lack of consensus on the potential risk this creates. For example, the Office for Budget Responsibility (OBR) see overseas holders of UK gilts as more sensitive to market movements compared to domestic investors as they prioritise higher returns over longer-term investments. Meanwhile, the DMO considers foreign investors to be an important part of its diverse investor base. Recommendation 3A: The Treasury, together with the DMO, should write to us, within two months of the conclusion of the CMA’s investigation, outlining what steps they will take to address the information gaps around identifying potentially unlawful activity, including:
Recommendation 3B: The Treasury should, as part of its Treasury Minute response, set out its assessment of how increasing foreign ownership is affecting the stability of the UK gilt market, and the steps the Treasury and the DMO can take to gain more information on the foreign holders of UK debt. We are concerned that significant problems with NS&I’s procurement of its Rainbow Programme could leave limited flexibility or room for further delays. During the COVID-19 pandemic, the Treasury required NS&I to raise £35 billion from retail savers – more than three times the previous year’s requirement. While unable to deliver this, NS&I managed to raise a record £23.8 billion. One of the challenges NS&I faced during the pandemic was its inability to scale up its customer facing operations owing to its reliance on a single service provider, Atos. NS&I is undertaking a modernisation programme, which it calls its Rainbow Programme, to move away from Atos to a multi-provider model. This project is already significantly delayed owing to bidders for one of the contracts submitting proposals that did not meet NS&I’s requirements. The Atos contract, due to expire in 2024, has been extended to March 2025 as a result. Following a lesson-learned exercise, NS&I redesigned the procurement process for this contract and eventually secured a successful bid in December 2023. NS&I aim to complete the Rainbow Programme in 2024-25 but this remains a complex project since the three winning bidders developed their plans in isolation, and they now need to be integrated. NS&I asserts that it can extend the Atos contract for an additional 12 months, which may not be enough contingency should NS&I experience further delays. Recommendation 4: NS&I should set out, as part of its Treasury Minute response, the following:
We are not convinced that the Treasury, DMO and NS&I have adequately captured the lessons learned during the financial crisis and pandemic to prepare them to deal with the challenges to come. Government borrowed vast amounts during both the financial crisis that began in 2007, and the COVID-19 pandemic. The DMO raised £486 billion during the pandemic, triple its original financing requirement for 2020-21. Borrowing such large amounts created significant challenges for Treasury, the DMO and NS&I and they assert that they have learned important lessons from these experiences. NS&I was unable to deliver its remit during the pandemic, raising £23.8 billion against a target of £35 billion, but it is seeking to address some of the underlying causes through Rainbow Programme which will provide more scalability and resilience through better digital processes. The DMO did deliver its financing remit with help from the Bank of England’s quantitative easing (QE) programme, which acted as a guaranteed buyer of government debt (albeit not directly). In the future, quantitative easing may not necessarily be available to support the DMO in raising such vast amounts of money for government. The DMO now needs to address some of the legacy issues created from the large-scale borrowing during the pandemic. This includes repaying the huge number of gilts in the years to come, peaking in 2024-25 with the DMO needing to repay £140 billion of gilts on behalf of government alongside raising large sums of money as part of the annual borrowing process. How the DMO responds to these challenges will aid future decision making during the next crisis. Recommendation 5: The Treasury, DMO and NS&I should set out, as part of the Treasury Minute response, the lessons they have identified and learned from the financial crisis and pandemic, including the process whereby these lessons are captured and the changes that have been made to the borrowing process because of these lessons. |