Selloff or Market Correction? Either Way, Here's What to Do NextSee Overvalued Stocks

UK Chancellor faces £10 billion deficit due to Bank of England's bond sales

EditorAmbhini Aishwarya
Published 10/11/2023, 04:42 pm
FLG
-
GB10YT=RR
-
GB30YT=RR
-

Today, UK Chancellor Jeremy Hunt is grappling with a £10 billion ($12.3 billion) deficit for public services or tax cuts in his forthcoming Nov. 22 economic statement. This predicament is largely due to the Bank of England's (BOE) active bond sales under its Quantitative Tightening (QT) strategy, a fiscal approach unique among the Group of Seven central banks. The QT strategy has imposed fiscal constraints on Hunt, limiting his ability to implement tax cuts ahead of a predicted general election next year.

Michael Saunders, a senior policy advisor at Oxford Economics and former BOE ratesetter, underscored the direct impact of these bond sales on the fiscal position. He projected that losses from gilt sales will reach £10 billion in 2028-29 — when fiscal rules require a decrease in national debt — as opposed to if bonds were allowed to mature naturally.

The BOE's acquisition of £895 billion in bonds from 2009 to 2021 resulted in a £124 billion windfall for the Treasury, which was expended by previous chancellors. However, high interest rates have since negated these gains, leading to anticipated government losses of £300 billion over the coming decade.

Despite lagging behind Labour in opinion polls and internal party dissatisfaction, Hunt has downplayed the prospects of tax cuts. Economists are concurrently urging him to increase investment and address the deteriorating state of UK's public services.

Andrew Hauser, BOE Executive Director for Markets, proposed that running QT "down to zero," thereby eliminating the government indemnity, would be an optimal outcome. Nevertheless, the BOE's decision to accelerate the pace of annual gilt reduction from £80 billion to £100 billion per year is set to result in an additional £5 billion of losses annually over the subsequent parliamentary term.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.