Administration and expenditure of the Chancellor's departments, 2007-08 - Treasury Contents

Examination ofWitnesses (Question Numbers 560-568)


26 NOVEMBER 2008

  Q560  Sir Peter Viggers: As we leave ports I think we all recognise, Ministers, that you have not come here this morning authorised to say that there will be a change in this situation, but we as a Committee tasked to scrutinise the Treasury's functions feel strongly that something should be done. I move on to the Debt Management Office. The Debt Management Office employed about 80 people before the present dramatic expansion in borrowing. There is some discussion about DMO being given further resources. Can you comment on that please?

  Ian Pearson: Firstly, I would want to say that the DMO people are doing a terrific job at the moment. They are certainly working hard under the current circumstances and, as you will be aware from when Nick Macpherson came and spoke to the Committee, Nick assured you that he is in regular meetings with the Head of the Debt Management Office and if they needed further resources those resources would be made available, and that remains the position.

  Q561  Sir Peter Viggers: An auction of gilts in July 2008 was only 1.1 times oversubscribed, which was a pretty poor result really. How confident are you that the DMO will be able to fund the enormous amount that you are calling upon it to try to obtain?

  Ian Pearson: Government assets are in strong demand both globally and in the United Kingdom and they do represent the preferred risk-free asset for major international investors and we have no reason to believe that that is not going to continue to be the case. When you look at the wider environment at the moment with falling interest rates and falling inflation as well, I think there is going to be a continuing strong demand for gilts in the future. You rightly highlight one of the auctions where there was not as high coverage as normal with regard to gilts, but if you actually look at the coverage rates so far this year they are slightly up on last year despite the fact that we have had bigger issuance as well, so I remain very confident that there is every reason why international and institutional investors will want to invest in UK gilts in the future.

  Q562  Sir Peter Viggers: But sterling has fallen considerably and the market which values creditability through credit default swaps values the United Kingdom less well than some UK companies. It costs more to insure the Government's creditability than some UK companies.

  Ian Pearson: I think there is a bit of rubbish being spoken by your leader of the Opposition on CDS and UK gilts. The simple fact of the matter is that CDS spreads, when it comes to sovereign debts, is pretty much an illiquid market at the moment. The fact is we have had two issues that have not been covered within the last 10 years when it comes to UK gilts. They do remain highly popular and I have got every confidence in the officials in the Debt Management Office to be able to continue to raise the funds that will be required in the future.

  Q563  Sir Peter Viggers: Giving evidence to us the Debt Management Office said: "If there is an uncovered auction we have processes in place to deal with that." What are the processes?

  Ian Pearson: A lot of processes relate to the fact that these issues will be taken up rather than through auction by other arrangements in the relatively unlikely event that a gilt auction is not fully covered. As I say, we have no reason to expect that future auctions will not be fully covered. We can never guarantee when we are talking about the sort of sums that we are here that there will not be a case in the future where there are problems with a particular auction, but I think there is every reason for the Committee to be confident that we have a very effective gilt-raising operation in the United Kingdom.

  Q564  Sir Peter Viggers: But the amount of prospective borrowing since the Budget has almost trebled. Do you expect the price of gilts to increase and have you factored a higher price into your calculations?

  Ian Pearson: I do not want to speculate on details of prices. Those will be determined in the normal way as part of the issuance process. In terms of the fact that we are going to need to raise more money through gilts, that is absolutely right. In actual fact, about two-thirds of the extra money that we need to raise currently is as a result of the bank recapitalisation programme and Bradford & Bingley and what we are doing with regards to the Financial Services Compensation Scheme to compensate people who have retail deposits in the Icelandic banks. That has required a significant additional level of activity on the part of the Debt Management Office. They have already significantly upped the amount of issuances so far this year. They have got a pretty significant forward programme for the rest of this current financial year, but, again, I have got every confidence in their ability to do that job and to raise the funds that we require.

  Q565  Sir Peter Viggers: Some commentators have said that it is rather surprising that long-dated gilts are not offered more than they currently are. Can you comment on that?

  Ian Pearson: We do offer long-dated gilts and obviously there is always an issue about the balance between short, medium and long term in terms of the offerings that we make. Certainly there is a significant market appetite at the moment for short-term gilts. We have also got a short-term requirement in the sense that some of the things that we want to do to raise funds have their timescale over the next two or three years, and we think it right that we should be matching the market appetite with our own requirements as a government for short-term finance, so I think the overall balance at the moment in terms of what we are proposing to do is the right one. We continue as a matter of course to consult and work closely with the markets about our forward programme so there should be no alarms and surprises when it comes to future issuances as well.

  Q566  Sir Peter Viggers: You were planning to increase VAT by 1% and your tax ready reckoner helpfully points out that this would have raised £5,000 million in 2011-12. How are you going to fill the black hole if you are not going to do that?

  Mr Timms: There is not a black hole. I think you will have gathered from the coverage since yesterday that we looked at a series of options in the lead-up to the Pre-Budget Report, as everybody would expect. There was an exercise looking at that particular option and that was rejected. In its place the fair way forward was determined to be the one that was announced by the Chancellor yesterday. The revenue that would have been raised by that measure is instead being raised by the announcement that the Chancellor made in the PBR.

  Chairman: The final area we want to look at this morning is the Government Actuary's Department. Nick Ainger?

  Q567  Nick Ainger: Ian, could I ask you about the Mineworkers' Pension Scheme. We asked the Government Actuary when he was here these same questions. There was an article by John Ralfe in the FT in July in which he claimed that there was a major problem arising in the future because of the way that the surpluses were being calculated by the Government Actuary. Mr Ralfe said in his article that these surpluses were fictitious and he went on to say that: "This is because the method of actuarial valuation, set down by the Government Actuary, understates liabilities by discounting at the expected return on assets, including 70% equities, not the index-linked gilt rate which would better reflect the fact that pensions are inflation linked and government guaranteed." He went on to say: "On an index-linked gilt basis, there was a £0.9 billion deficit at market values at the 2005-06 valuations, not the reported £1.9 billion surplus. In 2002-02 the deficit would have been a whopping £5.3 billion at market values, rather than the reported £0.7 billion deficit." To be fair to the Government Actuary, he had only recently taken up his post and really was not in a position to give us any detailed response, but if Mr Ralfe is right that we should be calculating the surpluses using the gilt rate, are we not building up a major problem in this pension fund because it is guaranteed by the taxpayer that in the future, if Mr Ralfe is right, then the taxpayer is going to have to be pumping money into the pension fund rather than taking, as it does at the moment, 50% of the surpluses?

  Ian Pearson: I am not aware of the particular article, but from what you are saying there it strikes me that there is clearly an issue about how you undertake valuations of pension funds and whether you base the valuation on the assets receiving the return that index-linked gilts would do or whether they receive some other sorts of returns that relate to the fact that they might have equity as part of their portfolio. I think the best thing that I can say in response to you is let me take the issue away and either the Government Actuary or I will write to the Committee and directly address the questions that you have raised.[8]

  Q568 Chairman: Anybody else? I think that you owe us a series of notes as a result of this morning because we have covered quite a range of topics. We will continue to press on the issue of ports re-evaluation. I hope you will continue to work with the Ports Minister on how the port operators might be persuaded to pass back some of the very considerable savings that they have made. I hope you will keep us updated on that work as it proceeds.

  Mr Timms: We are happy to do so.

  Chairman: In the meantime I thank all three of you for your attendance this morning.

8   Ev 110 Back

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 23 January 2009