The Bank of England’s bond sale slowdown provides the Chancellor with new financial flexibility ahead of the upcoming budget
Chancellor Rachel Reeves faces increasing pressure to restore winter fuel payments for millions of pensioners after the Bank of England announced a significant fiscal boost of up to £10 billion. This development stems from the Bank’s decision to slow down the sales of government bonds accumulated during the pandemic, providing Reeves with crucial leeway as she prepares for next month’s Budget.
Baroness Altmann, a former pensions minister, is among those advocating for the reinstatement of payments that would support up to 10 million pensioners, who previously qualified for as much as £300 each. Reeves had previously argued that means-testing these benefits would save the government £1.4 billion this year. However, Altmann contends that the unexpected financial cushion created by the Bank’s new approach should be redirected to bolster the incomes of vulnerable pensioners facing a challenging winter.
Embed from Getty Images“The first priority should be ensuring the safety of your citizens,” Altmann stated, stressing the urgency of restoring payments for the most financially vulnerable. She criticized the government for leaving the poorest pensioners unprotected as winter approaches, arguing that the need for assistance is pressing and unjustifiable.
The Bank of England’s decision relates to its quantitative easing program initiated over a decade ago. A prior arrangement with the Treasury necessitates covering any losses incurred from maturing or sold bonds. This fiscal year alone, the Treasury has already transferred £23.6 billion to the Bank to offset losses associated with what’s known as quantitative tightening (QT), which involves the sale of gilts.
Analysts from Goldman Sachs have warned that these losses have significantly constrained fiscal space for the government. On Thursday, the Bank’s policymakers unanimously decided to reduce their stockpile of government bonds by £100 billion over the next year. However, this time only £13 billion will be actively sold, compared to approximately £50 billion last year, affecting public finances by extending the loss recovery period.
This strategic change will create an estimated additional £10 billion in fiscal space for Reeves, alleviating the need for severe tax increases or spending cuts ahead of the Budget. The Office for Budget Responsibility (OBR) had previously assumed the same pace of bond sales, which would have necessitated considerable transfers from the Treasury to the Bank.
Sanjay Raja, chief UK economist at Deutsche Bank, also supports the view that the Bank’s decision could save up to £10 billion. However, the total will ultimately depend on the chosen fiscal rules and the OBR’s projections regarding QT.
Former Bank rate-setter Michael Saunders believes that modifying the debt rules to include the Bank of England’s holdings would be a prudent change, enhancing Reeves’s fiscal headroom without increasing borrowing. Governor Andrew Bailey expressed that he would welcome any changes to tax and spending rules that provide greater flexibility for the Chancellor.
A Treasury spokesman affirmed that decisions related to quantitative easing and tightening are under the jurisdiction of the independent Bank of England’s Monetary Policy Committee. The spokesman added that the OBR will conduct a comprehensive evaluation during the October Budget.
The Bank’s bond sales announcement coincided with its decision to maintain interest rates at 5%, with Bailey expressing optimism that borrowing costs could decrease further as inflation continues to ease.
By reducing its bond holdings, the Bank aims to create a buffer for future economic shocks and to prevent an upward trend in its balance sheet size, thereby increasing the flexibility available for future monetary policy actions.
Analysis:
Political Perspective: The growing pressure on Rachel Reeves to restore winter fuel payments illustrates the complex interplay between fiscal policy and public welfare. As the government navigates its fiscal responsibilities, the challenge lies in balancing budgetary constraints with the need to support vulnerable populations. The recent financial boost from the Bank of England could enable Reeves to prioritize social welfare in her Budget, potentially reshaping the political narrative surrounding government support for the elderly.
Social Perspective: Restoring winter fuel payments would address critical social issues, especially for the elderly facing economic hardships. The ongoing debate over means-tested benefits versus universal payments reflects broader societal values regarding support for vulnerable groups. The urgency expressed by Baroness Altmann highlights a societal expectation that governments should protect their most disadvantaged citizens, particularly during harsh winter months.
Racial Perspective: While the specific issue at hand pertains to pensioners, it is important to consider the broader context of how economic policies disproportionately affect different demographic groups. Elderly individuals from minority backgrounds may face heightened vulnerabilities due to systemic inequalities. Advocating for inclusive social support systems is vital for addressing these disparities and ensuring that all citizens have access to essential resources.
Economic Perspective: The Bank of England’s decision to slow down bond sales presents both challenges and opportunities for the UK economy. By easing fiscal pressures, the Chancellor may have the chance to implement policies that stimulate economic growth while simultaneously addressing social needs. This could have positive ripple effects on the overall economy, supporting consumer spending and boosting public confidence in government fiscal management.
