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.
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