The role of the Bank of England in UK borrowing and the National Debt is bigger than you might think

by Shaun Richards

Today has brought an update on what is the economic policy response to the Covid-19 pandemic. This has been the surge in fiscal policy and its deployment on a grand scale. By contrast monetary policy which had been the main response mechanism to the credit crunch has been reduced to a supporting role. Unless of course you believe a Bank Rate cut of 0.65%  will work when one of over 5% did not. Hard to believe now that the previous peak was 5.75% in early summer 2007 is it not?

We can take a look at this from this mornings’ figures.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £19.1 billion in February 2021, £17.6 billion more than in February 2020, which is the highest February borrowing since monthly records began in 1993.

We can compare that to Bank of England bond purchases which we were updated on yesterday.

The Bank intends to purchase evenly across the three gilt maturity sectors. For operations scheduled between 22 March 2021 and 6 May 2021 the planned size of auctions will be £1.48bn for each maturity sector. The range of gilts eligible for purchase will remain unchanged from previous operations.

It has been buying at that rate for a while and will therefore have bought £17.8 billion in February so slightly less than the borrowing requirement. However things are more complex than that as a UK Gilt of some £32.6 billion matured on the 22nd of January. There is not another one until the 7th of June so one can spread the effect but as you can see other buyers of Gilts are needed. Indeed some of the Bank of England purchases are replacing its holdings of that bond.

These purchases include the initial part of the reinvestment of the £7.0bn cash flows associated with the gilt maturity occurring on 22 January 2021 which the Bank intends to complete by the MPC’s May policy announcement.

So if we note the UK actually borrowed just over £23 billion in February and the Bank of England bought net say £16 billion then it was £7 billion short and we perhaps see a rationale behind higher bond yields.

February Details

There was some potentially good news form Income Tax.

Each February, accrued receipts tend to be boosted by the late payment of self-assessed taxes, due in January of each year. Self-assessed Income Tax receipts were £4.2 billion in February 2021, £0.9 billion more than in February 2020.

Regular readers will recall that January was better too.

Looking at January and February combined, self-assessed Income Tax receipts were £21.0 billion, £2.3 billion more than in the same two months last year.

There was a tax deferral which is why I added potentially to the good news but considering where we are the tax take looks pretty good.

In February 2021, central government receipts were estimated to have fallen by £0.9 billion compared with February 2020 to £63.2 billion, including £46.2 billion in tax receipts.

The main cautionary note is that whilst one might reasonably think the government would know the tax receipts for February it does not so there is the danger of revisions but the first signs are okay.

The real change has been on the spending side.

Central government bodies spent £79.2 billion in February 2021, £15.9 billion more than in February 2020.

One part of the deliberate fiscal stimulus is here.

In February 2021, central government paid £6.1 billion more in subsidies to businesses and households than in February 2020. These additional payments included the cost of the job furlough schemes; £3.8 billion as a part of the Coronavirus Job Retention Scheme (CJRS) and £0.1 billion Self Employment Income Support Scheme (SEISS). Additional transport subsidies account for much of the remaining £2.1 billion growth.

The transport issue is one which will return and has a local issue. What I mean is that in the many years I have lived in Battersea locals have dreamed of the London underground coming here. Now it is nearly here ( test trains have been run) how much will it be used? Also the difference between support for the employed and self-employed looks a lot to me.

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This is a sort of implicit fiscal response via extra health spending and the like.

Central government departments spent £5.8 billion more on goods and services in February 2021 than in February 2020, including £4.2 billion more on procurement and £1.5 billion more on pay.

There was also more spending on debt.

Interest payments on central government debt were £5.3 billion in February 2021, £1.2 billion more than in February 2020. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

So it will pretty much have been higher inflation but let me add a bit. As you will have seen from the breakdown above we will need on the first half of this year to refinance some £57 billion or so of maturing bonds plus new borrowing so the higher bond yields will begin to filter into the numbers in a drip drip fashion.

We did however save £1.3 billion on this.

 This month the UK did not record any of its regular VAT and gross national income-based contributions to the EU budget.

National Debt

The recording of this has become an example of this from Lewis Carroll.

Who are you?” said the Caterpillar.
This was not an encouraging opening for a conversation. Alice replied, rather shyly, “I—I hardly know, Sir, just at present—at least I know who I was when I got up this morning, but I think I must have been changed several times since then.”

Regular readers will know that I have drawn attention to many issues with the numbers over the years. But today let me zero in on the role of the Bank of England because in a combination of mishap and some incompetence it has become a major player when it should not be.

The story begins here.

Public sector net debt (excluding public sector banks, PSND ex) rose by £333.0 billion over the 11 months of the financial year-to-February 2021, taking it to £2,131.2 billion or around 97.5% of gross domestic product (GDP); maintaining a level not seen since the early 1960s.

But part of this involves counting capital gains on the QE portfolio as debt and even for these times it amounts to a tidy sum.

The estimated impact of the APF’s gilt holdings on debt currently stands at £113.1 billion, representing the difference between the value of the reserves created to purchase gilts (or market value of the gilts) and the face (or redemption) value of the gilts purchased.

Lewis Carroll would no doubt explain that much better than I.

Even someone who dislikes the Term Funding Scheme as much as me would not count every penny as debt.

At the end of February 2021, the TFS loan liability stood at £39.6 billion and the TFSME loan liability stood at £75.4 billion, making a combined liability of £114.9 billion, adding an equivalent amount to the level of debt.

Add in the Corporate Bond scheme and we are well on our way to six impossible things before breakfast.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of February 2021 would reduce by £232.5 billion (or 10.6 percentage points of GDP) to £1,898.8 billion (or 86.9% of GDP).


As you can see there is a lot going on beneath the surface with the UK public finances. Sadly what gets reported is often quite far from reality. But I do my best and I am pleased to report that my challenge to the UK Average Earnings numbers with their claimed 4.7% growth was successful. Below is a link to the Office for Statistics Regulation for their formal response.


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