As discussed in section 2.3, the change in cash management arrangements between the BEAPFF and HMT has no direct impact on the long standing UK fiscal measures, Public Sector Net Debt (PSND) and Public Sector Net Borrowing (PSNB). This is because the Bank of England, BEAPFF and HMT are all within the public sector, and so the flows of money all consolidate out (that is, cancel out). There is, however, an indirect impact on PSND as up until now the government has been borrowing money in order to pay gilt coupons (i.e. interest) to the BEAPFF. By drawing additional cash from the BEAPFF into government the government does not need to borrow so much money to meet its obligations and so, all things being equal, PSND will grow more slowly than it would if the cash transfers to government were not taking place. The reverse effect on the growth of PSND is likely to be observed when cash starts to be transferred from government to the BEAPFF.
The Public Sector Finances include not only public sector measures but also separate measures for Central, Local and General Government. As the Public Sector Finances are based on ESA 95, the flows of money between the BEAPFF and HMT are treated in exactly the same way as discussed in the previous section for the National Accounts – i.e. as dividends and super-dividends and capital transfers. This means that central and general government net borrowing and net debt are directly impacted by the cash flows from and to the BEAPFF.
However, to establish the impact of the flows on the main fiscal measures, Public Sector Net Debt and Public Sector Net Borrowing excluding the temporary effects of financial Interventions (PSND ex and PSNB ex), it is necessary to know whether the new cash flow arrangements should be considered as permanent or temporary effects of financial interventions.
Decisions on PSNB ex and PSND ex, the “ex-measures”, or any other areas where Public Sector Finances departs from ESA 95 principles, are informed by a body called the Public Sector Finances Technical Advisory Group (PSFTAG).
In light of the new arrangements PSFTAG considered both whether it was still correct to consider BEAPFF itself as a temporary effect of the financial crisis, and whether the cash moving to and from HMT should be treated as a temporary or permanent effect.
PSFTAG recommended firstly that the BEAPFF as a whole should continue to be treated as a temporary effect of financial interventions. Secondly, PSFTAG recommended that the cash flows between the Bank of England and Treasury should be treated as permanent effects and therefore (in accordance with the super-dividend test) impact on the headline deficit measure (PSNB ex).
These recommendations were based on published criteria3 for temporary or permanent effects of financial interventions. An important part of the rationale for the recommendations was the statement in the published criteria that “Bank of England run schemes indemnified by central government…are only regarded as having a permanent effect when there is an impact on the central government finances.” In the case of the BEAPFF (which is indemnified by central government), there is no direct impact on central government finances by its day to day operations, in which it purchases assets from the private sector (mainly gilts) and manages those assets. Therefore, the BEAPFF itself can be seen as a temporary effect of financial interventions. However, the new cash flows between the BEAPFF and HMT clearly have an impact on the central government finances and as such these flows can be seen as permanent effects of financial interventions.
The view of PSFTAG on continuing to treat the BEAPFF as a temporary effect was further supported by the argument that in the case of the Asset Purchase Facility overall, it is not clear when it will come to an end, how it will be wound down or whether at that point it will be in profit or loss . All these factors support treatment as a temporary effect of financial interventions.
The view of PSFTAG on treating the flows as permanent effects was further informed by desire for consistency of treatment with other financial interventions. An example of this is the treatment of fees paid to HMT by public sector banks under the credit guarantee and asset protection schemes. The fees from the public sector banks into central government are treated as permanent (and so included in PSNB ex and PSND ex) when they occur even though they originate from bodies deemed to be temporary effects of the financial interventions. Under the published criteria3 any guarantee payouts by government would similarly be treated as permanent effects. This treatment is analogous to that for the cash flows from and to the BEAPFF.