Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-72)


10 JANUARY 2007

  Q60  Chairman: What proportion of the £45 million, or whatever, could be invested more liberally, if you like?

  Ms Whelan: I think a very small proportion, a tiny fraction of that. The vast bulk of the £45 billion is, in fact, the National Insurance Fund that I mentioned, that is by far the largest of the funds, and that, in effect, is money that probably would be inappropriate to be invested in something like equities or whatever.

  Q61  Chairman: "Probably would be inappropriate"—what does that mean? You are not allowed to invest it on the stock market?

  Ms Whelan: At the moment it is not permitted to be invested in those anyway, but if one were thinking outside the box I think one would conclude that that would remain a valid conclusion.

  Q62  Mr Todd: To those of us who have served as councillors and are familiar with the Public Work Loans Board the level of activity has increased substantially recently. Is that mainly driven by the wish to refinance into longer term loans?

  Mr Stheeman: This is partly an answer to the question, yes, but it is also simply an acknowledgement that current rates are extremely low and to lock into current rates now is very attractive, and that is clearly the main driver for that.

  Q63  Mr Todd: In your report you set out that 23 January last year was a record day of activity. Had you anticipated the level of demand that you were likely to be facing?

  Mr Stheeman: Not directly, because obviously we did not know that on that particular day yields would dip as low as they did . You may recall I said earlier that a year ago we had a—

  Q64  Mr Todd: But these demand patterns are driven by local authority treasurers presumably?

  Mr Stheeman: Yes, but they observe what is going on in the gilts market, and what we tend to observe is that they tend to come in and draw down loans just at the moment that yields have gone very low but have begun to pick up. In other words, they will usually come in a couple of days after the lows and, you are absolutely right, 23 January last year was a key date. If I am correct the headlines about ultra-long bond yields hitting all time lows was on 17 or 18 January. Usually you can notice a little uptake very shortly afterwards, but you are absolutely right.

  Q65  Mr Todd: So there is a sort of lead time for local authority treasurers to absorb this information and act on it and it is about four or five days?

  Mr Stheeman: Yes, or because they think that rates are rising they feel they had better get in there quickly.

  Q66  Mr Todd: The limit that is set in law for the Board is £55 billion, and in your last account you were £47 billion. Is there any intent to review the legislative limit for the Board's activity?

  Mr Stheeman: I think that you are right, the limit is at £55 billion. I believe there is a provision which would allow the limit to go up to a sum not exceeding £70 billion in total, but clearly if this trend continues—

  Q67  Mr Todd: That needs Parliamentary approval.

  Mr Stheeman: Yes, and we would clearly need to speak to the Treasury if we felt that we were getting close to that specific amount.

  Q68  Mr Todd: Does the current level of activity suggest that you will need to consider that if it continues at the rate you report?

  Mr Stheeman: I think that is a possibility. Arguably we are still several billion away from that, but—

  Q69  Mr Todd: There was significant growth last year, was there not?

  Mr Stheeman: Yes.

  Chairman: A final question from Brooks Newmark.

  Q70  Mr Newmark: I wanted to pursue the discussion at the end. Could you take your civil servant's hat off for a moment and just answer a question directly. If in the real world of business you see the debt market move, you can be opportunistic and take advantage of that. Do you see any need perhaps, or any desire, or any possibility that you could talk to the Chancellor and say, "Actually we may want to consider being a bit opportunistic with the market and maybe have some small amount, or a reasonable amount of debt that one can be more opportunistic with"? I understand the point that you made; we should be predictable at the beginning of the year what the debt issue should be, and so on, but clearly there is a financial advantage to the Government, to the taxpayer, and so on, of being slightly more opportunistic than clearly the Government has been traditionally. Is that something you would ever recommend?

  Mr Stheeman: I did not realise I had such a civil servant's hat.

  Q71  Mr Newmark: You are usually cautious in your answers. That is what I mean.

  Mr Stheeman: You are right. I have a problem taking it off, especially on this point. Just to be quite clear, the Government's policy for the last, effectively, nearly 12 years now in terms of overall debt management has focused very much on this predictability and transparency aspect. The reason being that, yes, potentially there would be a short-term gain were we to be opportunistic, but debt management is a repeat game, we are a repeat borrower and at one point the market will come in and it will charge us a premium, and that I say wearing a market hat. "Opportunistic" sounds negative, but you might even dress it up in a rather pragmatic or a more market-oriented approach, but anything that is opportunistic, ultimately, I think, market theory would suggest it will charge you a premium for, and it was, I believe, the driver.

  Mr Newmark: Your phrase was, "The market taking advantage of what is going on in the market." If the market is where the market is and you can borrow more cheaply, anybody would do that. You are right, if you are being opportunistic, taking advantage of that has a negative connotation, but that is simply being practical. If the market is telling you, this is the cost of capital today and you have an ability to take advantage of that—

  Q72  Chairman: We have got that. Let us hear the rest of the answer.

  Mr Stheeman: The one thing I would say using the word pragmatic, which is something that we have been, is that you may be aware that in the current year's remit, for the first time effectively in 10 years, there was a small limited element of flexibility built into our borrowing. So, whereas before we are told exactly in advance how much we are doing in shorts, mediums, longs and linkers, there was a small amount (£10 billion, relative to the overall £63 billion) which was deemed flexible, and that was there not to take advantage of any specific market but to enable us potentially to react, having discussed with the Treasury if it was necessary, in a certain way if there was a major shift in demand patterns away from what we would have seen at the beginning of the year and anticipated at the beginning of the year; but whether we continue that or not is not at all clear.

  Chairman: We must leave it there. On behalf of the sub-committee, could I thank you and your colleagues very much for appearing before us.

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