Select Committee on Treasury Minutes of Evidence



SIXTH SUPPLEMENTARY MEMORANDUM BY HM TREASURY

RESPONSE TO REQUESTS FOR INFORMATION IN LETTER DATED 5 APRIL 2000 FROM THE TREASURY SUB-COMMITTEE

Copies of the quarterly reports submitted by the Debt Management Office to HM Treasury assessing its performance against a counterfactual measure

  A copy of the most recent reports currently available, covering the period April-December 1999, are attached.[6] We will supply the report for the most recent quarter, which is not yet ready, by 17 April.

An explanation of the impact of the proposed 2000-01 financing requirement on the stock of Treasury Bills, perhaps drawing on that given for 1999-2000 in table 9 of the Debt Management Report 1999-2000.

  The 2000-01 proposals will bring the stock of Treasury bills to £10 billion at 31 March 2001.

  Table 9 in the 1999-2000 Debt Management Report illustrated the changes necessary to bring the stock of Treasury bills at 31 March 2000 to £10 billion, and the balance on the Ways and Means facility to £17 billion. In 2000-01 the gilts sales residual from 1999-2000 performs the same function.

  The table below shows the divergence of short term debt stocks from the plans in the 1999-2000 Debt Management Report. Projected short term debt stocks at 31 March are £9.5 billion less than forecast in the 1999 Budget, which underpinned the financing arithmetic in the 1999-2000 Debt Management Report. This £9.5 billion is the gilt sales residual from 1999-2000 in the financing arithmetic for 2000-01 (table 7 in the 2000-01 Debt Management Report). In 2000-01 gilts sales are reduced by £9.5 billion due to the residual. The counterpart is that short terms sales will be £9.5 billion higher. That will bring short term debt stocks back to the level planned in the 1999-2000 Debt Management Report (£10 billion Treasury bills; £17 billion balance on Ways and Means).

MOVEMENTS IN SHORT TERM DEBT 1999-2000 (£ billion)
1999 Budget Forecast
31 March 2000
2000 Budget Projection
31 March 2000
Divergence
Ways & Means17.015.0--2.0
T-bills10.02.8--7.2
Other short term debt--0.2--0.5--0.3
Total26.817.3--9.5

Details of what is meant by "pre-financing foreign currency debt due to mature in 2001-02 and 2002-03", including an analysis of its possible implications for the level, maturity and transparency of the foreign currency debt reserves.

  As stated in the 2000-01 Debt Management Report, if the forecast central government net cash requirement for 2000-01 is revised down during the year then before reducing gilts issuance the Treasury will consider pre-financing some of its foreign currency debt. This is therefore a contingency measure. Pre-financing is distinct from the re-financing of foreign currency debt which is planned for 2000-01 in that it would involve replacing debt which does not mature until after the financial year 2000-01.

  The foreign currency debt that might be pre-financed is:

    —  a total of £3.8 billion maturing in 2001-02 (a $2 billion bond maturing in July 2001, a $2 billion floating rate note maturing October 2001 and a (2 billion note maturing in January 2002); and

    —  a total of £1.9 billion maturing in 2003-03 (a $3 billion bond maturing in December 2002).

  Pre-financing would be carried out by swapping surplus sterling receipts into foreign currency assets. Decisions on the maturity range of those assets would be for the Treasury to determine on advice from the Bank of England and would depend on circumstances nearer the time: however, when compared to financing through the issue of foreign currency debt, swapping out of gilts need not limit options on maturity. There would be no change in the Treasury's foreign currency exposures. Whilst there would be a temporary rise in the Treasury's spot reserves this would be offset by a fall in the forward book.

  On the liabilities side, the amount of gross foreign currency debt issued by the Treasury would reduce under pre-financing as existing debt matured over time to the extent that the Treasury would be substituting financing of the foreign currency reserves with sterling for financing through borrowing directly in foreign currency.

  The arrangements for regular and transparent reporting of the position in relation to the foreign currency reserves would be unaffected by any decision to use the pre-financing contingency measures set out in the Debt Management Report.

A statement on the closing balance of the Ways and Means overdraft and any measures taken to increase that balance, including an explanation of why such measures were considered necessary.

  The 2000-01 Debt Management Report assumed a balance on the Ways and Means of around £15 billion on 31 March 2000, compared to the £17 billion assumed in the 1999-2000 Debt Management Report. During 1999-2000 the Government's finances turned out significantly better than forecast in the 1999 Budget. This improvement was largely absorbed through a reduction in short term debt, including the balance on the Ways and Means facility at the Bank of England.

  The 2000-01 Debt Management Report noted that during 2000-01 the Government planned to bring the balance on the Ways and Means facility back to £17 billion in a limited series of transactions agreed in advance with the Bank of England. Prior to the transfer of cash management from the Bank of England to the Debt Management Office the Ways and Means facility had two functions. It was an overdraft facility for the Government's cash management function. But it was also an asset backing the Bank's note issue. The Bank still require assets to back the note issue and would replace a shortfall below £17 billion in the Ways and Means facility with other assets. The Government therefore agreed to bring the balance back to £17 billion during the course of 2000-01 (though should the financing requirement be reduced during the year, the published contingency arrangements allow the planned Ways and Means balance to be changed to £15 billion).

NOTE ON ISSUES RAISED IN QUESTIONS 596-614 AT THE TREASURY SUB-COMMITTEE HEARING ON 5 APRIL 2000

  It is important to clarify the answers to questions 596-601 by stating that the questions were in respect of the Public Works Loan Commissioners and the answers were in relation to the National Debt Commissioners. Although this confusion was corrected in some measure in the answers to questions 605 and 610, the misunderstanding pervaded the remaining evidence, leading to other misconceptions. The Treasury therefore wishes to state more clearly the role of the Public Works Loan Commissioners as asked. This is important if the Sub-committee is to be able to draw meaningful conclusions from the evidence.

  The Commissioners are an active body who meet on a regular basis to conduct their business. Their statutory role is to provide loans to local authorities: they have never been seen as an advisory body as such to Ministers and Government, other than in relation to their own affairs. With regard to questions 605-614, the Commissioners' role is to make decisions on lending and this is done with the advice of their Secretary and their staff who put those decisions into effect. The Secretary in turn maintains an ongoing dialogue with the Treasury and other Ministerial departments as necessary to inform decisions on both sides.

  In the answer to question 602, the decision made by Sir Andrew Turnbull was in respect of the problem facing him as Accounting Officer for the National Loans Fund. The Commissioners, taking account of points made by Sir Andrew, discussed the issue, including the impact on local authorities (question 603), and made their own decision to stop lending beyond 25 years. This decision was conveyed to Sir Andrew with the Commissioners' comments on some of the possible ramifications.

  With regard to question 614, the Public Works Loan Board is not strictly a part of the Treasury. Nevertheless, the financial nature of the department's business requires close co-operation with the Treasury and the Chancellor has traditionally acted as the Commissioners' link to Parliament.


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