This statement explains how the treatment of cash transfers from the Bank of England Asset Purchase Facility to HM Treasury will impact on Official Statistics. It sets out where the transfers will be recorded in the National Accounts and in the Public Sector Finances which include statistics on public sector net borrowing and net debt.
Issue date: 21 February 2013
In 2009, the Bank of England established a separate company, Bank of England Asset Purchase Facility Fund Ltd (BEAPFF). Since then, the BEAPFF has been purchasing UK Government gilts as part of Quantitative Easing, funded by a loan from the Bank of England. It now owns a large stock of gilts, and therefore receives large interest payments from HM Treasury. These interest payments received, less the interest payments that the BEAPFF has to pay to the Bank of England on the loan required to purchase the gilts, have been building up in a cash reserve. It is estimated that, ignoring any cash transfers to HM Treasury, this BEAPFF cash reserve would have reached £35 billion by end-March 2013.
The Office for National Statistics classified the BEAPFF, in 2009, as part of the Bank of England. The Bank of England is classified as a Public Financial Corporation, and therefore not as part of the General Government sector.
In Public Sector Finances statistics, the BEAPFF is treated as a temporary effect of the government’s financial interventions and is therefore excluded from the headline measures of Public Sector Net Borrowing (PSNB ex) and Public Sector Net Debt (PSND ex), which exclude any temporary effects of financial interventions. This means that the interest payments on these gilts continue to increase PSNB ex and the face value of the stock of gilts continue to be included as a government liability within PSND ex.
On 9 November 2012, the Bank of England and HM Treasury announced jointly that, instead of the net interest payments being held in a cash reserve, they would be transferred to the Treasury. It is expected that, eventually, Quantitative Easing will end and that these gilts will be sold. The activities of the BEAPFF are indemnified by the Treasury, so the Treasury would benefit from any BEAPFF profits, but would have to cover any BEAPFF losses.
Following recommendations from the National Accounts Classification Committee (NACC), The Public Sector Finances Technical Advisory Group (PSFTAG) and Eurostat, it has been decided that:
The Asset Purchase Facility will continue to be treated as part of the Bank of England in National Accounts and Public Sector Finance statistics.
The flows of cash from the BEAPFF to HM Treasury, up to the level of the combined Bank of England’s ‘Entrepreneurial Income’ from the previous year, are treated as final dividends and therefore reduce the level of General Government Net Borrowing by that amount. However, anything above this level will be treated as a special transaction in equity, known as a super-dividend, which will not impact on the level of General Government Net Borrowing. (This calculation is known as the super-dividend test.) Whatever the impact on General Government Net Borrowing, the full value of the payments will impact on the General Government Net Cash Requirement.
Any flows of cash from HM Treasury to the Bank of England in the future to cover losses made by the BEAPFF will be treated as Capital Transfers and so will impact (in the opposite direction) on measures of General Government Net Borrowing and General Government Net Cash Requirement.
The BEAPFF as a whole should remain classified as a temporary effect of financial interventions as the end state of the BEAPFF remains unknown.
The payments between the Bank of England and Treasury should be treated as permanent effects and therefore impact on the headline measures of Public Sector Net Borrowing (PSNB ex) and Public Sector Net Debt (PSND ex), which exclude temporary effects of financial interventions.
In applying the super-dividend test to the Asset Purchase Facility cash transfers, it is necessary to examine all flows from the Bank of England to HM Treasury. In April 2012 there was a payment of £2.3 billion from the Bank of England to HM Treasury relating to the Special Liquidity Scheme. The National Accounts Classification Committee has concluded that this payment should also be treated as a dividend and subject to the same guidance on treatment of super-dividends.
Overall the impacts of these decisions are to:
Reduce General Government Net Borrowing under the Maastricht deficit and debt definitions and Public Sector Net Borrowing excluding temporary effects of financial interventions (PSNB ex). On current government plans the reductions would be approximately £6.4 billion in 2012/13 and by an estimated £12 billion in 2013/14.
Have no impact on Public Sector Net Borrowing including temporary effects of financial interventions (PSNB).
Not directly reduce General Government Gross Debt under the Maastricht definitions or Public Sector Net Debt including temporary effects of financial interventions (PSND). However, reductions in these measures are likely to be realised as gilt issuance schedules are modified to reflect the additional cash being received by Government.
Reduce Public Sector Net Debt excluding temporary effects of financial interventions (PSND ex) by the full value of the cash being transferred. This is estimated to be £11.3 billion by the end of 2012/13. Further transfers from the Asset Purchase Facility in 2013/14 and beyond will lead to further reductions in debt.
For more detailed information explaining the guidance in more detail, and a high level summary of how ONS has applied the guidance, see: http://www.ons.gov.uk/ons/guide-method/classifications/na-classifications/classification-articles/changes-to-cash-management-arrangements/index.html
As part of this process we sought the advice of Eurostat on the key decisions which are based on the guidance in their Manual on Government Debt and Deficit. The announcement today is consistent with all of the Eurostat advice.
More information on the National Accounts Classification Committee and its membership is available on the ONS website at: http://www.ons.gov.uk/ons/guide-method/classifications/na-classifications/the-national-accounts-classification-committee/index.html
The Public Sector Finances Technical Advisory Group is a sub-group of the Public Sector Finances Data Group. It includes members from ONS, HM Treasury and the Department of Communities and Local Government (DCLG).Its role is explained in an ONS article which can be read here: http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/production-of-the-public-sector-finances-statistical-bulletin--responsibilites-and-accountabilities/art-psf-sb--responsibilities-and-accountabilities-.html#tab-Decisions-on-scope-and-methodology
Eurostat is the statistical office of the European Union, and oversees the production of EU statistics on the National Accounts and Government Deficit and Debt under the Maastricht Treaty. It is a legal requirement for European Union countries to compile National Accounts on the basis of a Eurostat Manual, ESA95. The United Kingdom government has chosen to base its main fiscal aggregates on the same ESA 95 rules and principles.
Further guidance, including a detailed explanation of the super-dividend test and capital injections test, is contained in Eurostat’s accompanying Manual on Government Deficit and Debt, which is available on the Eurostat website at: http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/methodology/ESA_95