WINTER FUEL CUT ‘NO LONGER NECESSARY’ AS REEVES HANDED £10BN BOOST
Rachel Reeves has been urged to restore winter fuel payments for millions of pensioners after the Bank of England handed the Chancellor a fiscal boost worth up to £10bn.
The Bank said on Thursday it would slow down the sales of government bonds amassed during lockdown. The decision will give Ms Reeves more breathing room at next month’s Budget because of the way the scheme is accounted for on the Government’s balance sheet.
Baroness Altmann, a former pensions minister, urged the Chancellor to use the extra headroom to reverse her decision to strip 10m pensioners of a payment of up to £300 this winter.
Ms Reeves said making winter fuel benefits means-tested would save the Government £1.4bn this year. Lady Altmann said the savings from the Bank’s decision should be used to boost pensioner incomes.
She said: “The first thing you should do is make sure your citizens are safe.
“The poorest citizens at the moment have been left without protection for the winter. So the most urgent for me would be to restore the payments that people were expecting and needing, because the poorest pensioners are currently being left at serious risk this winter for no cogent reason.”
The extra headroom delivered to the Chancellor by the Bank of England relates to the way the central bank’s bond buying scheme – known as quantitative easing – was set up more than a decade ago.
A previous agreement struck by the Treasury means it must make the Bank whole on any losses incurred when bonds either mature or are sold.
The Treasury has already transferred £23.6bn to the Bank this financial year alone to cover losses on so-called quantitative tightening (QT), which accounts for the sale of gilts.
Analysts at Goldman Sachs have previously warned that losses on gilts were “weighing heavily on fiscal headroom”.
Bank of England policymakers on Thursday voted unanimously to reduce the stockpile of gilts held by £100bn over the next 12 months.
While this is the same pace of reduction as this year, only £13bn of these bonds will be actively sold by the Bank as opposed to being allowed to mature naturally. This compares with roughly £50bn of active sales the previous year. This change to the mix of sales has a significant impact on public finances as it spreads losses from the scheme over a longer period.
The effect will be to increase the Chancellor’s headroom by up to £10bn before the Budget, reducing the need for large tax hikes and spending cuts. The Office for Budget Responsibility (OBR), the Government’s tax and spending watchdog, has based its forecasts on the assumption that the Bank’s mix of bond sales would be roughly the same as last year, which would entail significant transfers from the Treasury to the Bank of England.
In June, Goldman said “an additional £10bn of fiscal space” could be freed up against the current target to get debt falling in the fifth year “if the OBR extrapolates forward the slower pace of sales”.
Sanjay Raja, chief UK economist at Deutsche Bank, also said the Bank’s decision could save up to £10bn but added that the ultimate total would “come down to the choice of fiscal rules as well as the OBR’s assumptions around medium-term QT”.
Changes to the target itself could also increase Ms Reeves’s headroom to £25bn, based on previous market pricing.
Michael Saunders, a former Bank rate-setter, said changing the debt rule to include the Bank of England would be a “totally sensible change”. While including the Bank would inflate the national debt, Covid-era loans made to businesses that are currently being repaid would help drive a faster reduction of the total over the next five years.
Mr Saunders said: “It would create more headroom. I don’t think she should use that headroom to do extra borrowing, but use it to have more headroom against her fiscal rules.”
Governor Andrew Bailey said he was “very relaxed” about any change in tax and spending rules adding: “It doesn’t really affect at all what we do… and so it’s an important decision for [the Chancellor].”
A Treasury spokesman said: “Decisions regarding quantitative easing and tightening are rightly for the independent Bank of England’s Monetary Policy Committee.
“The overall gains or losses from the Asset Purchase Facility are highly uncertain and predominantly determined by interest rates and gilt prices. The OBR will make a full assessment at the October Budget.”
The Bank’s bond decision came as officials voted to keep interest rates on hold at 5pc on Thursday. Mr Bailey said he was “optimistic” that borrowing costs “will come down further” this year as inflation continues to cool.
Commenting on its decision, the Bank said a steady reduction in the amount of government bonds it held on its balance sheet – which ballooned to £895bn during the height of the pandemic – would help to provide an extra cushion for future economic shocks.
Policymakers said it would also reduce the risk of a “ratchet upwards” in the size of the Bank’s balance sheet over time, “increas[ing] the headroom and flexibility available to the Bank to use its balance sheet in the future if needed”.
The Bank currently has a stockpile of £659bn in government gilts on its balance sheet.
2024-09-19T11:56:34Z dg43tfdfdgfd