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UK needs robust debt management strategy, says ICAEW

The government should update its treasury management strategy and assess the UK's resilience to adverse developments in credit markets, according to ICAEW. In its examination of the government's debt funding strategy for the Institute of Fiscal Studies' Green Budget 2017, ICAEW concludes that with £646bn of new debt to be raised over the next five years a robust treasury management strategy is needed.

Complete analysis

ICAEW's detailed examination and recommendations are available in full as part of the IFS Green Budget 2017.

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Over the past five years, the UK government raised £635bn from external investors to cover the spending commitments not covered by taxes and other income.

This figure was significantly higher than the levels of funding required prior to the 2008 financial crisis and, despite £293bn less being needed to fund the fiscal deficit, the amount the government needs to raise from external investors over the next five years has grown to £646bn.

Level of UK public debt from 2007 to 2017 infographic from ICAEW's analysis of the UK's debt funding strategy within the IFS Green Budget 2017

In its analysis of the UK government's approach to debt funding for the Institute of Fiscal Studies' Green Budget 2017, ICAEW highlights that the government’s most recent treasury strategy was published in 1995 and predates Bank of England independence, the global financial crisis, quantitative easing and Brexit.

ICAEW concludes a fresh review should be undertaken that takes into account these events, as well as developments in treasury management, and calls for the inclusion of robust scenario planning. These ‘country level stress tests’ should consider a range of potential scenarios, including low-probability high-impact events such as a weakening in sovereign debt markets or a loss of confidence by investors in the UK.

Five year funding requirements for UK from 1992 to 2021 infographic from ICAEW's analysis of the UK's debt funding strategy within the IFS Green Budget 2017

The ICAEW's analysis also examines the government’s current external debt position and the cost of financing that debt, as well as plans to raise fresh funds and risks, such as exposures to changes in inflation and interest rates.

Key findings include:

A single percentage point increase in inflation and in short-term interest rates would increase interest charges by around £10 billion a year. 

By purchasing gilts the Bank of England has significantly altered the risk profile of the government’s debt portfolio, resulting in exposure to changes in short-term interest rates.