Britain paying £251 billion “Tory bond blackhole” as collapse in Treasury bond fund revealed

A Treasury fund originally designed to profit from the Bank of England’s quantitative easing programme has turned from a £73.6 billion asset into a £177.6 billion liability in the space of just three years, shock new figures have revealed.

The black hole in the Treasury’s bond fund began to appear during Rishi Sunak’s term as Chancellor, but dramatically increased in size as a result of the economic crash triggered by last September’s ‘Kamikaze Budget’.

According to the Treasury’s latest statement of its ‘group financial position’, the fund went from being the biggest asset on its balance sheet in March 2020 to its biggest liability at the end of March 2023, thanks to the £251 billion decline in its value.

That is equivalent to 10 per cent of the UK’s gross domestic product in 2022, or the entire GDP of Scotland and Wales combined. In spending terms, it would pay for the running costs allocated by central government last year to every school and police force in England, every branch of the armed forces, and the whole of NHS England.

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 by a previous Tory government during the exchange rate chaos of Black Wednesday in 1992.

As a result of these losses, the Treasury’s calculation of the returns that the taxpayer has made over the total lifetime of the fund has also shifted from a £128 billion net profit at the end of March 2021 to a £58.8 billion net loss at the end of March 2023. 

As recently as July 2021, when Rishi Sunak was Chancellor, the Treasury’s annual report for 2020/21 dismissed the prospect of the taxpayer facing a net loss over the lifetime of the Treasury’s bond fund as a “remote possibility”.

The figures were slipped out 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.

Rachel Reeves MP, Labour’s Shadow Chancellor, 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.”

Ends

Notes:

How did we get here?

The Asset Purchase Facility was created in January 2009 as part of the Bank of England’s quantitative easing programme, introduced by the Bank – with support from the Treasury – to help the UK’s recovery from the global financial crisis. 

The Bank bought up hundreds of billions of pounds worth of government bonds and other assets held at the time by banks, pension funds and other finance companies, providing them with a vital source of liquidity in an otherwise frozen market.

As the economy started to recover and interest rates stayed close to zero, government bonds once again became an attractive option for corporate investors, and the asset portfolio built up by the Bank began to increase in value. 

In 2013, Chancellor George Osborne changed the rules governing the Asset Purchase Facility to ensure that any profits made on the Bank of England’s investments would in future flow to the Treasury. 

Rachel Reeves, then Shadow Chief Secretary to the Treasury, warned George 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.” 

And the Office of Budget Responsibility was among those to warn that Osborne’s changes would also leave the taxpayer holding the bill if borrowing costs rose and the value of the Bank’s asset portfolio started to fall. Now, according to the Treasury’s balance sheet for the year 2022/23, that risk has come to dramatic fruition.

What do the figures show?

The last five annual reports from HM Treasury, including the one published in July, show the value of the Asset Purchase Facility reaching a peak by the end of March 2020, before starting to decline to its latest position at the end of March 2023. 

For the most part, the changes seen above represent shifts in the market value of the assets held in the Bank’s portfolio, but in some years, these changes have also reflected decisions by the Treasury to cash in a proportion of the assets and move the profits from their sale into the Exchequer’s consolidated fund. 

For example, the decline of £58.4bn in the value of the APF in 2020/21 was down to the combination of a £44.8bn write-down in the market value of the portfolio and cash transfers of £13.6bn from the Bank to the consolidated fund.

However, it should be noted that the subsequent reductions in the value of the APF in 2021/22 and 2022/23 were down entirely to the declining market value of the portfolio, according to the Treasury annual reports for those two years.

A stark illustration of the losses suffered by the APF comes from looking in the Treasury’s annual reports at its statements of the ‘Treasury Group Financial Position’ at the end of each financial year. The highlighted items in the collection of statements below show how the APF has turned from the Treasury’s biggest asset into its biggest liability, and how that has affected the department’s overall financial position.

All the figures above represent the value of the Bank of England’s APF portfolio at the end of each financial year, and therefore provide the best guide to how much of an asset or liability it represents to the taxpayer at each of those points.

However, the decline of the past three years has also affected the calculations made by the Treasury of the amount that the taxpayer has gained or lost over the whole lifetime of the Asset Purchase Facility. 

According to the last two Treasury annual reports, the APF’s lifetime performance declined from a profit of £128 billion at the end of March 2021 to a profit of £79.8 billion at the end of March 2022, before falling into negative territory in the last financial year, with a lifetime loss of £58.8 billion at the end of March 2023.

As recently as the 2020/21 annual report (p118), when Rishi Sunak was Chancellor, the Treasury said there was only a “remote possibility” that there would be a net loss to the taxpayer over the lifetime of the Asset Purchase Facility, despite acknowledging that the value of the asset portfolio had declined by £44.8bn in that year alone. 

In her foreword to that Annual Report, then Exchequer Secretary Kemi Badenoch made no mention of those losses, or the performance of the fund in general. 

All the Treasury annual reports referred to above can be found at this link: https://www.gov.uk/government/collections/hmt-annual-report

Have other commentators highlighted this problem?

Yes, the National Institute of Economic and Social Research published a report last month highlighting the losses, setting out that ‘the public sector has bought assets at a high price, sold some of them at lower prices, and those that it still holds are now worth less on average than it paid for them’. It makes clear that ‘these are real losses, which taxpayers will have to bear. https://www.niesr.ac.uk/news/ongoing-costs-quantitative-easing

Comments from Rachel Reeves and the Office of Budget Responsibility on George Osborne’s planned changes to the Asset Purchase Facility can be found in the FT’s article from 9 November 2012, under the headline: “Osborne launches raid on QE surplus”. https://www.ft.com/content/ca6c4e16-2a65-11e2-99bb-00144feabdc0