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QE interest rate swap goes into reverse

Author: ICAEW Insights

Published: 22 Nov 2022

October public sector finances see the Bank of England call on HM Treasury indemnity for the first time to cover interest outflows on quantitative easing balances.

The monthly public sector finances for October 2022 released on Tuesday 22 November 2022 reported a provisional deficit for the month of £13.5bn, bringing the total for the first seven months to £84bn. 

This is the first release since the Autumn Statement, in which the Office for Budget Responsibility (OBR) forecast a deficit for the full year to March 2023 of £177bn, up from the previous official forecast of £99bn. The release included the initial costs of the energy price guarantee for households and businesses over the winter, and for the first time saw interest paid on quantitative easing (QE) deposit liabilities at the Bank of England exceed coupons paid on the gilts it owns, as the QE interest rate swap went into reverse. HM Treasury has saved more than £120bn in net interest payments since 2009 under its indemnity with the Bank of England for QE, but going forward the OBR expects HM Treasury to pay more than £133bn back to the Bank of England to cover interest payments to depositors.

Public sector net debt was £2,460bn or 97.5% of GDP at the end of October, up £87bn from £2,373bn at the end of March 2022. This is £640bn higher than net debt of £1,820bn on 31 March 2020, reflecting the huge sums borrowed over the course of the pandemic. The OBR is now forecasting that net debt will reach £2,571bn by March 2023 and is on course to approach £3tn by March 2028.

The deficit for the month of £13.5bn was £4.4bn higher than the £9.1bn deficit reported for October last year but was lower than the £17.8bn reported for September 2022.

The cumulative deficit for the first seven months of the 2022/23 financial year of £84bn was £22bn lower than this time last year and £141bn lower than the previous year during the first stages of the pandemic, but £35bn more than the deficit of £49bn for first seven months of 2019/20, the most recent pre-pandemic comparative period. 

Tax and other receipts in the period to 31 October amounted to £554bn, £58bn or 12% higher than a year previously. Higher income tax and national insurance receipts were driven by rising wages and the higher rate of national insurance, while VAT receipts benefited from inflation in retail prices. Receipts included £3.5bn in accrued revenue for the energy profits levy ‘windfall tax’.

Expenditure excluding interest and investment for the seven months of £542bn was £5bn higher than the same period in 2021/22, with Spending Review planned increases in spending, higher interest costs, and the initial payments of the energy price guarantee starting to offset the furlough programmes and other pandemic spending in the comparative period.

Interest charges of £70bn were recorded for the period to October, £30bn or 71% higher than the £41bn reported for the equivalent period in 2021, through a combination of higher interest rates and higher inflation driving up the cost of RPI-linked debt. 

Cumulative net public sector investment to October was £26bn. This is £1bn more than a year previously, much less than might be expected given the Spending Review 2021 pencilled in significant increases in capital expenditure budgets in the current year.

The increase in net debt of £87bn since the start of the financial year comprises the deficit for the five months of £84bn plus £3bn in net cash outflows, representing funding for student loans, lending to business and other loans together with working capital movements less repayments of deferred taxes and loans made to businesses during the pandemic.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “The cost of the energy price guarantee and higher interest costs were the biggest drivers behind the increase in the deficit, which at £13.5bn saw interest payments from the Bank of England to HM Treasury for quantitative easing go into reverse for the first time. Public sector net debt reached £2,460bn, on track to reach the OBR’s latest forecast of £2,571bn by the end of this financial year.

“The Autumn Statement last week highlighted how constrained the Chancellor is by the accumulation of debt, which saw him compound the economic misery facing the country by cutting back on public investment over the next five years. The government is short of money and the potential for further tax rises in the Spring Budget should not be discounted.”

Public sector finances: trends

 Receipts  466  425  497  554
 Expenditure  (457)  (583)  (537)  (542)
 Interest  (38)  (25)  (41)  (70)
 Net investment  (20)  (42)  (25)  (26)
 Deficit  (49)  (225)  (106)  (84)
 Other borrowing  12  (52)  (43)  (3)
 Debt movement  (37)  (277)  (149)  (87)
 Net debt  1,816  2,097  2,312  2,460
 Net debt / GDP  81.6%  99.1%  98.0%  97.5%

Source: ONS, ‘Public sector finances, October 2022’.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised, as estimates are refined and gaps in the underlying data are filled.

The ONS made several revisions to prior period fiscal numbers to reflect revisions to estimates and the inclusion of the energy profits levy for the first time. These had the effect of reducing the reported fiscal deficit for the six months ended 30 September 2022 by £2bn from £73bn to £71bn.

For further information, read the public sector finances release for October 2022.

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