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Government borrowing and the Whole of Government Accounts Contents

1Borrowing and the public finances

1.On the basis of a report by the Comptroller and Auditor General and the Whole of Government Accounts for the year ended 31 March 2016, we took evidence from HM Treasury (the Treasury), the UK Debt Management Office (DMO) and National Savings and Investments (NS&I) on government borrowing and debt.1

2.Government borrows by issuing government bonds, known as gilts, through the UK Debt Management Office (DMO) to large investors in the capital markets, or by encouraging savers to invest in National Savings & Investment (NS&I) retail products such as Premium Bonds. As government’s economic and finance ministry, the Treasury has overall responsibility for government’s financial strategy and fiscal policy. Drawing on the independent forecasts produced by the Office for Budget Responsibility (OBR), the Treasury decides each year on the total amount of borrowing it needs and how much the DMO and NS&I need to raise.2

Levels of borrowing and fiscal risks

3.Government’s annual spending has exceeded its income for the last 15 years and, because of this, the Government has a significant amount of debt outstanding from financing past annual deficits. Public sector net debt (PSND), government’s preferred statistical measure for reporting on the public finances, was around £1.7 trillion at March 2017.3 By comparison, the latest Whole of Government Accounts (WGA) provides a financial reporting view of the public finances, which takes into account a broader range of assets and liabilities. The latest WGA reports that total debt from borrowing was £1.3 trillion at March 2016: around £47,000 for each UK household. Interest on debt cost government £222 billion in the period 2009−10 to 2015−16.4 Government recognises that public sector debt is too high relative to the UK’s economic performance, and it has targets to reduce levels of borrowing and debt by 2020−21.5 Figure 1 shows that PSND as a share of gross domestic product (GDP) has risen from around 65% in 2009−10, immediately after the banking crisis, to 86% in 2016−17. In November 2017, the OBR published a forecast that showed it expected PSND as a share of GDP to peak in 2017−18, however it also revised down its forecasts for UK productivity and economic growth.6

4.Private debt as a share of GDP has remained persistently high since the banking crisis, and stood at around 230% at the end of 2016.7 We are particularly concerned about the impact that rising levels of household debt could have on both individuals and the public finances, especially interest-only mortgages.8 Recent media reports suggest that around a fifth of outstanding residential mortgages in the UK are interest-only, and the Council of Mortgage Lenders estimates around 1.9 million borrowers are simply paying off the interest on their debts.9 Risks arising from consumer debt are identified and monitored by the Bank of England’s Financial Policy Committee (FPC), which is responsible for protecting and enhancing the resilience of the UK financial system. The FPC’s most recent Financial stability report, which sets out the FPC’s view on the stability of the UK financial system, concluded that “the level of household indebtedness in the United Kingdom has fallen but remains high relative to incomes”. However, the FPC noted that highly indebted households may still pose risks to UK financial stability, either by amplifying economic downturns (as spending is cut back to meet mortgage payments) or through failing to meet debt repayments which leads to losses for lenders.10 In written evidence provided to us after the session, the Treasury stated that mortgage arrears and repossession are at “historically low levels” and that the Financial Conduct Authority, which regulates financial services firms, continues to monitor lenders’ treatment of borrowers with interest only mortgages.11

Figure 1

Growth in government borrowing since 2009–10 using a range of measures

Debt measure









Public sector net debt (PSND)









PSND as a % of gross domestic product (GDP)









Whole of Government Accounts borrowing and financing








Not available

Public sector net financial liabilities (PSNFL)








Not available

Source: Office for National Statistics, Public Sector Finances; HM Treasury, Whole of Government Accounts

5.The Government recognises that productivity growth over the last few years has been disappointing.12 In Budget 2017, the Government announced its plans to “expand the National Productivity Investment Fund (NPIF) to support innovation, upgrade the UK’s infrastructure and underpin the Government’s modern Industrial Strategy”. However, the OBR currently forecasts future growth will be slower than previously forecast, and now estimates that the Government has £14 billion headroom to meet its borrowing target in 2020−21. The Government has increased the amount it expects to borrow by £55 billion between 2018−19 and 2021−22 but this estimate may be further affected by economic performance, the terms agreed for exiting the EU and significant changes to government’s balance sheet. For example, if planned assets sales are delayed or generate less income than expected, more borrowing will be needed.13

6.In addition to its regular forecasts, in July 2017 the OBR also published its first Fiscal risks report which provides an independent view of risks to the public finances. The OBR prepared this report in response to a recent recommendation from the International Monetary Fund that government should “publish a comprehensive fiscal risk report combining the analysis of macroeconomic risks, the modelling of the fiscal impact of severe shocks, and a discussion of the magnitude and likelihood of specific fiscal risks.”14 In its report, the OBR highlighted the biggest potential risks that would affect the whole economy, including: shocks like recessions and financial crises; sustained productivity weakness; and risks that would affect large parts of public spending (such as shocks affecting debt interest).15 We asked the Treasury how it monitored these and other fiscal risks, and in particular risks arising from government’s exposure to specific sectors of the economy. The Treasury told us it had two standing groups, a Fiscal Risk Group and a Balance Sheet Group, that bring together information from across government to get a sense of fiscal risks that might be emerging. When asked to provide a specific example of a significant fiscal risk it was paying close attention to, the Treasury highlighted a number of risks relating to the tax base, for example, the trend for people to incorporate and work as self-employed rather than employees. Government has committed to responding formally to the OBR’s first report in summer 2018.16

7.We also asked the Treasury and the DMO how confident they were in their ability to adapt and respond to unexpected or uncertain changes in borrowing needs. The Treasury noted that the DMO has proven it can raise funds quickly, citing the dramatic increase in the DMO’s expected borrowing requirement at the onset of the banking crisis in 2008. In this case, the DMO’s annual remit (the amount Treasury tells them to borrow) increased from £80 billion in 2008−09 to £220 billion in 2009−10. The Treasury noted that it may be more challenging for the DMO to meet government’s borrowing needs in the future given the already high level of debt, and that government would be better placed to respond to future recessions and shocks once the debt is lower. However, it views the institutional arrangements in place as very strong, and observed that the DMO is highly respected and trusted in the market. Similarly, the DMO was confident in the arrangements in place, and suggested that the market response to the large increase in the DMO’s remit in 2009 showed that such increases were both operationally possible and that there was flexibility in the market.17 However, future risks and uncertainties remain, such as the uncertainty in the public finances arising from the UK’s exit from the EU, and the eventual unwinding of the quantitative easing programme.18 In addition, the proportion of index-linked gilts in the gilt portfolio (where interest payments are adjusted in line with the UK Retail Prices Index) has increased from 24% in March 2009 to 34% in March 2017 (excluding gilts held by the Bank of England), increasing government’s exposure to inflation risk and potentially higher interest costs on its future borrowing.19 The OBR attempts to anticipate the impact of such events through its forecast assumptions; however, the reliability of these assumptions will only be tested over time.20

Cost-effective borrowing through NS&I

8.To deliver its remit, NS&I must balance the interests of savers by offering a fair return and the interests of the taxpayer by minimising finance costs. At the same time, it must also maintain an appropriate competitive position in the retail savings market. Currently, NS&I holds around a 9% share of the £1.7 trillion UK retail savings market, with a debt portfolio at March 2017 of £148 billion.21 We asked NS&I how challenging it was to meet its annual remit (the amount Treasury tells them to borrow) without distorting the market. NS&I told us it managed this challenge by being clear with the market how much it is planning to raise overall, by monitoring its market position and considering its potential impact on competitors. NS&I explained it would only take action to change its market position following careful evaluation, and in order to balance the interests of the market, savers and the taxpayer.22 For example, after 2008−09 NS&I experienced a considerable inflow of funds following the flight to safety response to the financial crisis when investors sought the security of its government-backed investments. NS&I took action to reduce the inflow by reducing the returns offered to savers, reducing the demand for NS&I products and responding to concerns about the health of the market.23 Similarly, in February 2017 NS&I reduced the interest rates on four of its variable rate products, in order to balance the need to meet its ‘annual remit’ with the interests of stakeholders.24

9.We asked NS&I how cost-effective it was compared to other means of borrowing. NS&I said it saw itself as very cost-effective and highlighted that its indicator of cost-effectiveness, the Value Indicator, implies that NS&I borrowing is competitive relative to gilt borrowing. However, this indicator has fallen from £1.4 billion in 2009−10 to £74 million in 2016−17, largely due to government bond rates falling faster than the rates NS&I can offer on its products. NS&I noted that its ability to provide cost-effective borrowing is constrained to some degree by needing to balance the interests of multiple stakeholders. For some products, NS&I faces the further challenge of balancing wider policy objectives with the need to provide cost-effective borrowing. For example, we are told that its 65+ Guaranteed Growth Bond, introduced by the Government in 2015 to reward a specific group of savers, offered market beating rates, became the “biggest selling retail financial product in Britain’s modern history”. As these policy products often offer rates of return above market rates, they are generally excluded from NS&I’s indicator of cost-effectiveness.25 The estimated costs of such products are set out alongside the relevant Budget when they are launched; for example Budget 2014 and Budget 2015 set out costs relating to the 65+ Guaranteed Growth Bonds of £295 million.26

Announcing future changes to the public finances

10.In Autumn Statement 2016, the Chancellor abolished future autumn statements and spring budgets in favour of just one Autumn Budget each year. The Chancellor announced that this change would “allow for greater Parliamentary scrutiny of Budget measures ahead of their implementation.”27 This change was in response to the International Monetary Fund’s recommendations to enhance the UK’s fiscal transparency and allow for greater external and Parliamentary scrutiny of new tax and spending measures before they are introduced in the next financial year.28

11.The OBR is legally required to publish two forecasts each year and until now has published these forecasts alongside the Spring Budget and Autumn Statement. The Government will respond to the OBR’s March forecast in a Spring Statement in 2018. We asked what effect the move from two fiscal events to one would have on the Treasury’s presentation of key financial information, in terms of Parliament’s accountability and transparency. The Treasury assured us that, following the change, Parliament will still have the information it has available today. For example, the estimates process, by which Parliament authorises government’s spending plans, would continue as before and the timing of OBR publications would be unaffected. The Treasury indicated that the change may lead to a higher degree of consultation on future Budget measures than has been possible in the past. However, it is still considering how exactly it will respond to the OBR’s spring forecasts and communicate changes to the budget in 2018 and beyond.29

1 Report by the Comptroller and Auditor General, Evaluating the government balance sheet: borrowing, Session 2017–19, HC 526, 7 November 2017; HM Treasury, Whole of Government Accounts: year ended 31 March 2016, HC 254, July 2017

2 C&AG’s Report, para 2–3

3 Office for National Statistics, Public sector finances, UK: March 2017, April 2017

4 C&AG’s Report, para 5–6

5 Q 4

6 Office for Budget Responsibility, Economic and Fiscal Outlook, Cm 9530, November 2017

7 C&AG’s Report, Figure 6

8 Qq 101–104

9 Financial Times, Ticking time bomb of interest-only mortgages, 21 July 2017

10 Bank of England, Financial Stability Report, Issue number 42, November 2017

12 Q 103

13 HM Treasury, Autumn Budget 2017, HC 587, November 2017; Office for Budget Responsibility, Economic and fiscal outlook, Cm 9530, November 2017

14 International Monetary Fund, United Kingdom: Fiscal Transparency Evaluation, November 2016

15 Office for Budget Responsibility, Fiscal risks report, July 2017

16 Qq 25, 27–32

17 Qq 10, 33–36, 71

18 C&AG’s Report, para 24

19 C&AG’s Report, para 18

20 Qq 12–13

21 C&AG’s Report, para 4.2, 4.15

22 Qq 91–93

23 Q 94

24 C&AG’s Report, para 4.17

25 Qq 85–87; C&AG’s Report, para 4.6, 4.13

26 HM Treasury, Budget 2014, HC 1104, March 2014; HM Treasury, Budget 2015, HC 1093, March 2015

28 International Monetary Fund, United Kingdom: Fiscal Transparency Evaluation, November 2016

29 Qq 14, 24

25 January 2018