Labour has accused the government of “catastrophic financial mismanagement” and claimed it has “lost” £251bn from the value of assets created to rescue the banking sector after the 2008 financial crash.
The party said analysis of recently published figures showed that a decline in the value of the Bank of England’s assets – over which the Treasury acts as a guarantor – was a huge loss to taxpayers, “equivalent to 10% of gross domestic product (GDP) in 2022, or the entire GDP of Scotland and Wales combined”.
In a report assessing the impact on the exchequer, Labour said the problem began when Rishi Sunak was chancellor in 2020 and worsened in the aftermath of former chancellor Kwasi Kwarteng’s disastrous mini-budget in September last year.
Labour said the figures were “slipped out” last month in the Treasury’s annual accounts for 2022/23, “one of 108 ‘transparency’ publications issued by the government on 20 July to coincide with the start of the parliamentary recess and the three by-elections held on that day”.
Last year, in the aftermath of Kwarteng’s budget, investors spooked by the prospect of unfunded tax cuts, sold UK government bonds, sending their value plummeting and the interest payable to the highest level since 2008.
Labour’s calculation is based on accounting rules used by public companies that judge the value of assets in the Bank’s £804bn Asset Purchase Facility (APF) based on how much they are worth on a particular day.
Rachel Reeves said that bonds purchased by the Bank as part of its quantitative easing programme were a benefit to the Treasury in 2019, making it an asset worth £76.8bn. That was before a sharp reversal by April this year that transformed it into a £177.6bn liability.
“This Tory bond black hole will land working people with another astronomical bill for years to come,” said the Labour shadow chancellor.
The Treasury’s independent economic forecaster, the Office for Budget Responsibility, and the National Institute of Economic & Social Research (NIESR), have warned that the government’s finances will come under increasing pressure from the sharp increase in interest rates on bonds held by the Bank.
They said the interest payments on bonds held in the APF could soar to £150bn.
“The APF now looks likely to make a loss of some £40bn this year, next year and the year after,” said the head of NIESR, Jagjit Chadha.
“While the costs of this operation must be put against the benefits of stabilising the economy after the financial crisis, the scale of these losses will constrain fiscal space for much of the rest of this decade,” he added.
Richard Murphy, professor of accounting practice at Sheffield University Management School, said the government should refuse to pay the interest on bonds held by UK banks.
Murphy calculated that UK banks held an average of £360bn on deposit with the Bank over the last two years and these deposits will benefit from recent interest rate rises that have taken the Bank’s base interest rate to 5.25%.
He said the UK should follow in the footsteps of the European Central Bank and the Bank of Japan, which only pay the headline interest rate on a proportion of bond holdings.
The UK banks could benefit from £18bn a year of the £40bn expected to be paid by the Bank, and reimbursed by the Treasury.
Murphy said: “At a time when austerity is threatened the necessity of making this payment has to be questioned.”
Earlier this year, the German Bundesbank said soaring interest rates meant it suffered a €1bn hit on repayments to bond holders.
Last week, the central bank’s executive board reduce the repayments on domestic government deposits to 0%.
Last year the Bank of England ruled out a similar move saying if the Treasury wanted to claw back interest payments to high street banks, it should impose a windfall tax.