Neil Wilson
First published 27th December 2022 here
Eliminating the cost of the Asset Purchase Indemnity
Summary
In 2012, the Bank of England agreed to transfer gilt coupon payments received within the Asset Purchase Facility to HM Treasury. That resulted in a “positive cash flow” from the Bank to HM Treasury of some £120 billion over the period since then. However, this becomes net zero when viewed from a “whole of government” perspective since the coupons came from the Consolidated Fund in the first place.
Now the Bank of England has decided to sell the gilts in the Asset Purchase Facility as part of its unwinding programme, which has already resulted in an emergency transfer payment from HM Treasury to the Asset Purchase Facility using the Contingencies Fund. Further transfers are expected to total some £80 billion or so over the lifetime of this Parliament.
Under the current approach, payments will require voted funding from Parliament and will cause more gilts to be issued by the Debt Management Office. This will increase the amount of debt interest due to banks, increase government spending, and interfere with the Bank of England’s monetary policy.
This paper lays out an alternative using existing resources and legislation that requires no further vote funding in Parliament, no additional debt interest payments, and likely restores the “positive cash flow” of the Asset Purchase Facility for the remainder of this Parliament.