Rishi Sunak has been accused of squandering £ 11bn of taxpayer money by paying too much interest on government debt service.
Calculations by the National Institute for Economic and Social Research, the UK’s oldest non-partisan economic research institute, show that the losses stem from the fact that the chancellor did not take out insurance against rate hikes. of interest a year ago on nearly £ 900bn of reserves created by the quantitative easing process.
The loss to taxpayers is greater than the amount the Conservatives have accused former Labor Chancellor and Prime Minister Gordon Brown of costing the UK between 2003 and 2010, when he sold some of the country’s gold reserves to very low prices.
Jagjit Chadha, director of Niesr, said Sunak’s decisions had burdened the UK with “a huge bill and continued continued exposure to interest rate risk”, adding that it was the fault of the Treasury.
“It would have been much better to have reduced the scale of short-term liabilities before, as we argued for a while, and reaped the benefits of long-term debt issuance,” he said.
The Treasury said: “We have a clear financing strategy to meet the financing needs of the government, which we establish independently of the monetary policy decisions of the Bank of England.”
Under the QE program, the Bank of England raised £ 895 billion and used most of the cash to buy government bonds from pension funds and other investors in the financial markets.
When these investors put the deposits in commercial bank deposits in the BoE, the central bank had to pay interest at its official interest rate.
Last year, when the official rate was 0.1 percent, Niesr recommended that the government insure the cost of servicing this debt against the risk of rising interest rates by turning it into government bonds with a longer maturity.
“There are strong arguments to consider adjusting the balance sheet now when interest rates are still low,” Niesr wrote last summer.
The government’s lack of action, despite Sunak regularly warning of the risks of higher inflation and interest rates on public debt service costs, has now cost taxpayers £ 11bn, Chadha said. .
The Treasury is in charge of managing the details of QE. Although the BoE decided how much QE to implement, it acted as a government agent in the technical implementation of the program.
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BoE is expected to raise interest rates from 1 percent to 1.25 percent next week and could even follow the Federal Reserve to implement a 0.5 percentage point increase to make facing the UK inflation problem.
Consumer prices were 9% higher in April than a year earlier, the highest in the G7, and the inflation rate is expected to rise above 10% in the autumn.
With the UK having nearly £ 500bn in public debt tied to inflation rates, the cost of debt service is projected to rise from £ 53.5bn in 2021-22 to £ 83bn in 2022-23 .
This increase is mainly due to rising inflation, but also reflects rising interest rates, which increases the net costs of the QE program for taxpayers.
Since its launch in 2009, QE has significantly reduced the overall cost of public debt service while interest rates were hovering near zero, but it will save much less money as rates rise.
The Office for Budget Responsibility, the UK’s spending control body, has said that one of the biggest risks to the UK’s public finances is exposure to interest rate risk because QE reduces effective maturity of public debt.
“Much of the impact of higher interest rates on public finances is now occurring quite rapidly,” the OBR warned last year in its fiscal risk report.