Funding Policy (Hansard, 17 March 1994)

§ Mr. Nelson

The Chancellor has decided to set an annual remit for the Bank of England's operations in the gilt market to clarify responsibilities between the Treasury and the Bank, and to explain the Government's intentions to the markets. The remit will be published before the start of each new financial year.

Every year, the Government aim to sell enough gilts and national savings products fully to fund the PSBR, maturing debt that needs to be refinanced, and any net increase in the 823W United Kingdom's foreign exchange reserves. There is no change to the Government's funding policy as set out in the November 1993 medium-term financial strategy.

The Treasury is responsible for all borrowing for the National Loans Fund, under the terms of the National Loans Act 1968. The Bank of England has long been the Government's adviser and agent in the gilt market, where the bulk of these funding operations are carried out.

The Chancellor will also give the Bank guidelines for the detailed operation of its remit. In the past, individual decisions on funding were taken after discussion between Treasury Ministers, Treasury officials, and the Bank of England. In future, any operations the Bank proposes that fall within the remit and the guidelines will normally be approved by Treasury officials. The Bank will send a monthly report to Treasury Ministers on progress, and there will be regular review meetings between the Treasury, the Bank and the Department for National Savings.

The remit for 1994–95 is as follows:

Funding requirement

As set out in the November 1993 Financial Statement and Budget Report, the Government will continue to operate a full fund policy.

The PSBR for 1994–95 was forecast in the Budget to be £38 billion. Some £9 billion of gilts are expected to mature in market hands and need to be refinanced. Maturing and withdrawn National Savings products will be netted off the National Savings contribution to funding, rather than included in the funding requirement. It is not possible at this stage accurately to forecast net changes over the year in the foreign currency reserves, so these will be assumed to remain unchanged on balance. Any overfunding in 1993–94 will reduce the funding requirement in 1994–95, and any underfunding increase it. The funding outturn for 1993–94 is not yet known.

The funding requirement for 1994–95 is currently forecast to be around £47 billion, adjusted for any over- or under-funding carried forward from 1993–94, and subject to any changes in the Reserves.

National Savings

The net contribution of National Savings to funding (including accrued interest) is assumed to be around £3½ billion. this is not a target, but an estimate based on experience in previous years and forecasts for 1994–95.

Other debt sales

Net sales of government debt instruments other than gilts and National Savings are expected to make a negligible contribution to funding.

Sales of gilts to banks and building societies

As announced at Budget time, the sales of gilts to banks and building societes in 1992–93 will be taken into account before the end of 1994–95. These amount to £6.8 billion, and the required level of gilt sales will be reduced by that amount.

Quantity of gilt sales

The Bank of England will aim to meet the remainder of the funding requirement by selling gilts to the private sector on the government's behalf. On the basis of the Budget forecast, this means selling approximately £37 billion of gilts, adjusted for any over or under-funding carried forward from 1993–94, and any change in the Reserves.

Pace of funding

The Bank should aim to sell at a broadly even pace through the year.

Methods of sale

Auctions will continue to form the backbone of gilt-edged funding. They will be held at broadly monthly intervals, each normally on the last Wednesday of a calendar month. Each auction should be between £2 and 4 billion of stock.

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The remainder of gilt sales may be made by ad hoc taps and tenders.

Review

This remit may be reviewed and, if appropriate, revised by Her Majesty's Treasury from time to time. Revisions will be published.