Monday, June 27, 2022

Sunak hasn’t cost taxpayers £11billion through inaction, but questions remain over quantitative easing

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Allegations that the Chancellor ‘wasted’ £11bn of taxpayers’ money draw attention but require the benefit of hindsight

The accusation, led by the financial times (FT) and the think tank of the National Institute of Economic and Social Research (NIESR) is that the Treasury has failed to insure itself against rate hikes on £900 billion of debt financed by the government’s quantitative easing program ( QE) were created.

Allegations that the Chancellor has ‘squandered’ £11bn of taxpayers’ money draw attention but offer a relatively simple version of events and rely on a considerable amount of retrospective to be convincing.

The argument is that last year, when the official interest rate on these reserves was 0.1 percent, the Treasury should have swapped the whole lot into longer-dated government bonds with fixed interest rates.

In other words, it should have foreseen an environment in which interest rates could rise due to the inflationary situation the UK – and world – economy is in. While some of this was predictable, the ongoing impact of Covid and the ongoing disruption to supply chains, a significant factor – Russia’s invasion of Ukraine and the resulting impact on oil and gas costs – might have prompted Sunak to polish his crystal ball .

Say Nieesr and die instead FTinterest rates on the QE debt have risen from 0.1 per cent to 1 per cent, or the equivalent of £11bn in interest payments that should not have been made.

Even the FTThe business editor of , Chris Giles, who wrote the piece, admits that this calculation is a simplistic view of the situation, and granted on Twitter that “there are legitimate questions about how much savings were actually possible”.

For one, converting that QE debt into bonds – a £600bn two-year government bond by NIESR’s own estimate – would likely have a bigger impact on prices if the government became a big player overnight. There would have been a domino effect on many banks, investors and regulators that would be difficult to quantify but likely financially damaging.

A second problem would have been that interfering with the Bank of England’s QE program would have meant interfering with its independence. As the Treasury itself stated, forcing commercial banks to swap reserves for gilts would be “an act of financial repression” and would likely damage the credibility of the UK economic structure.

Finally, we should acknowledge that although NIESR warned last year – as did Policy Exchange, Boris Johnson’s former economic adviser Gerard Lyons and many others – moving money from QE reserves into Gilts would still have been a bet on the future interest rate environment. In hindsight, Sunak might have invested that money in something more lucrative, like gas, used cars, or cryptocurrencies.

But while it’s arguable whether the Chancellor did in fact cost the Treasury £11billion on a single action he did or didn’t take, there is certainly a broader point about missed opportunities and the way in which they did so government makes decisions about its QE program.



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