2.1 About the Bank of England Asset Purchase Facility Fund Ltd
In 2009, the Bank of England established a separate company, Bank of England Asset Purchase Facility Fund Ltd (BEAPFF), as the vehicle to undertake Quantitative Easing (QE). Funded by a loan from the Bank of England, the BEAPFF has since bought assets worth almost £375bn. The vast majority of these assets are UK Government gilts, bought on secondary markets, with a range of maturities.
As a result of these purchases, the BEAPFF receives large coupon (interest) payments from Her Majesty’s Treasury (HMT). Although it also pays interest on the loan from the Bank of England these interest payments have been much lower than the interest received and so the cash has been building up into a cash reserve.
Over time, the expectation has always been that Quantitative Easing will end, and that the gilts will be sold back to the market. The accumulated cash reserve was being retained to cover any losses made by the BEAPFF as Quantitative Easing was unwound.
However, the activities of the BEAPFF are subject to an indemnity (guarantee) from HMT, such that HMT is entitled to any profit the BEAPFF eventually makes and is responsible for any losses it incurs.
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. On current government plans, the excess cash that has built up between the start of the BEAPFF activities to March 2013 will be transferred to HMT over 2012/13 and 2013/14, and there will be additional regular quarterly payments to prevent the further build up of reserves.
In the longer term, as Quantitative Easing is unwound, should the BEAPFF make losses, then HMT will transfer over money to cover any loss made.
2.2 Classification of the BEAPFF
With the exception of a short period immediately following its creation in 2009 when it was funded by a loan from HM Treasury, the BEAPFF has been classified by the Office for National Statistics, as if it were simply part of the Bank of England.
The Bank of England is classified as a Public Sector Financial Corporation, and therefore not part of the Government sector.
2.3 Impact of Quantitative Easing on Debt and Deficit Measures
ONS publishes a number of different measures of the Government or public sector debt and deficit.
The international measures under the Maastricht Treaty, which ONS publish twice a year in the “Government Deficit and Debt Under the Maastricht Treaty” statistical bulletin. These are General Government Consolidated Gross Debt and General Government Net Borrowing and these measures only include bodies classified within the Government sector.
In the UK, the main statistical measures, which are published in the monthly Public Sector Finances statistical bulletin, are Public Sector Net Debt (PSND) and Public Sector Net Borrowing (PSNB). These measures include all bodies classified in the Government sector, but also public sector controlled companies, referred to as Public Corporations, both Public Non-Financial Corporations (such as Royal Mail, or Manchester Airport Group) and Public Financial Corporations (including the Bank of England, BEAPFF and public sector controlled Banks).
Up until 2007, PSND and PSNB were the principal measures used by the UK Government in setting and monitoring its fiscal policy. In response to the unprecedented events and actions taken by the Government following the financial crisis in 2007-8, two new measures were created - Public Sector Net Debt and Public Sector Net Borrowing excluding the temporary effects of financial interventions (PSND ex and PSNB ex). As the names imply, these measures strip out any actions undertaken by the Government or the Bank of England, in response to the financial crisis that are deemed to be temporary, including the activities of the BEAPFF. These two “ex measures” are now used as the main fiscal measures by the UK Government.
The Quantitative Easing undertaken by the BEAPFF has a different effect on each of these different measures:
For the Maastricht measures, there has been little impact until now. Prior to the creation of BEAPFF and the start of QE, government gilts were owned by various non-government bodies such as domestic and overseas banks, insurance companies and pension funds. They were government liabilities to bodies outside the government sector. As the BEAPFF is also classified outside of government, this has no impact on levels of government liabilities.
For PSND and PSNB there is an effect. Gilts previously owned by the private sector were purchased by the public sector. This means that interest flows for the gilts held by the BEAPFF merely go from one part of the public sector to another and so do not appear in the overall public sector net borrowing (PSNB) (as the flows consolidate out). Similarly, government liabilities to the private sector became government liabilities to other parts of the public sector, which would have meant these also disappeared (as they consolidated out). However, the purchases of gilts by BEAPFF were funded by the Bank of England through the creation of new bank reserves (themselves a form of liability), so as a result of QE, the UK public sector has exchanged one type of liability (the gilts) for another type (the Bank of England bank reserves). The effect is that public sector net debt (PSND) is only impacted by the difference between the value of the Bank of England loan and the face value of the BEAPFF gilt holdings.
For PSND ex and PSNB ex (the “ex measures”), the BEAPFF purchases of the gilts and the loan from the Bank of England are outside the ex-measure boundary. However, the interest flows between HMT and the BEAPFF cross the this boundary and so do not consolidate out in PSNB ex as they do in PSNB, which results in PSNB ex being greater than PSNB all else being equal. Similarly, the liabilities of the BEAPFF do not consolidate out in PSND ex as they do in PSND and so what are recorded in PSND ex are the government liabilities to the BEAPFF, that is the face value of the BEAPFF gilt holdings.
The change in cash management arrangements between the BEAPFF and HMT changes the situation:
For the Maastricht measures it creates a new flow of money from outside Government to the Government (that if the cash been retained within the BEAPFF, or the gilts remained owned by the private sector, would not take place);
There are no direct impacts on PSND and PSNB, as the flows of money all take place within the public sector (although there is an indirect impact on PSND discussed further in section 4);
For PSNDex and PSNBex, the change in policy potentially results in a flow of money from outside the ex-measure boundary to inside the boundary, thus potentially affecting these two measures.
The National Accounts Classification Committee (NACC) and the Public Sector Finances Technical Advisory Group (PSFTAG) have been discussing how these flows should be treated in the National Accounts (including the Maastricht Deficit & Debt measures), and the Public Sector Finances measures.
These committees have made a number of recommendations, resulting in decisions by Caron Walker, the ONS Executive Director with overall responsibility for National Accounts, and Jil Matheson, the National Statistician, on how these flows should be treated.