Taxpayers brace for £100bn money-printing bill – as George Osborne says it’s ‘not my responsibility’

George Osborne
George Osborne tells The Telegraph that QE 'seemed sensible at the time' - DANIEL LEAL-OLIVAS/AFP/Getty Images

George Osborne has insisted a money-printing spree that is set to cost the taxpayer £100bn seemed “sensible at the time”.

The former chancellor said quantitative easing, under which the Bank of England created £895bn of money to buy bonds, “was a necessary policy to get us out of the financial crash, and contributed to the fastest recovery of any G7 economy”.

He added that it was “not my responsibility” to oversee the present status of the scheme, which is costing the Exchequer tens of billions of pounds because of an agreement with the Bank that losses should be borne by the taxpayer.

The policy began in the financial crisis, holding down borrowing costs for the government, injecting liquidity into financial markets and, initially, making a profit for the Bank.

In 2012 Osborne transferred profits from the scheme to the Treasury, lowering the Exchequer’s borrowing requirements – but agreeing, as part of this deal, to also bear the weight of any losses in future.

However, higher interest rates and lower bond values mean the Bank is now losing money on the scheme.

As a result, in the past year the Treasury has transferred £44bn to the Bank to cover the losses. The Office for Budget Responsibility (OBR) expects an overall net cost to the public purse of more than £100bn.

Osborne said QE was vital in the wake of the financial crisis.

Asked about the losses being made on the scheme, he said: “It was sensible at the time, and remains… it was a necessary policy to get us out of the financial crash, and contributed to the fastest recovery of any G7 economy.

“It was all part of a plan that convinced the world Britain had got its act together.

“The Treasury and Parliament at the time assessed all the eventualities. Of course there were gains for the Exchequer back then.

“I can’t speak for the current situation – that is not my responsibility any more.”

Conservative MPs are demanding that the current chancellor, Jeremy Hunt, reassesses the system and pushes the Bank of England to stop selling bonds at a loss.

Greg Smith, chairman of Conservative Way Forward, said: “It’s not at all clear why the Bank is choosing to sell billions of pounds worth of bonds a year into the market, taking larger losses than would be incurred if they simply held them to maturity.

“The chancellor is not powerless to stop this. The Treasury is the ultimate guarantor – in fact this is something the Bank of England insisted upon. The Bank of England views itself as a mere agent of the Treasury in this regard. Therefore the chancellor can have an influence on when these bonds are sold.”

Danny Kruger, an MP on the Treasury Select Committee, said Hunt should step in.

“As the Treasury – the taxpayer – has undertaken to guarantee these losses, the chancellor should have an influence on when these bonds are sold. It makes little sense to generate such huge losses, when those losses would be minimised if they were held to maturity,” he said.

The costs come at the worst possible moment for Hunt, who is grappling to cut taxes, boost defence spending, support the NHS and hit his borrowing targets.

His goal is to get the national debt falling as a share of GDP in five years’ time. He is on course to do that, the OBR estimates, by a margin of just £8.9bn.

The scale of QE losses is very sensitive to the path of interest rates in the coming years, which means the chancellor’s headroom to hit that target is vulnerable to minor moves in financial markets.

It is also a threat to Labour. The party has promised sound finances should it win the upcoming general election. However, like Hunt, it finds itself vulnerable to the whims of financial markets which can throw QE costs up or down by tens of billions of pounds.

To understand how a scheme meant to keep borrowing costs down ended up costing so much, it is necessary to look back to 2009 when QE was first used in Britain.

In the teeth of the financial crisis, the Bank of England cut interest rates from 5.75pc to 0.5pc. But this was not enough and officials, led at the time by Mervyn King, wanted to do more.

Taking its lead from the Federal Reserve in the US, the Bank of England agreed with Alistair Darling, then chancellor, that it would launch a programme of QE – creating money and buying bonds to loosen up financial markets and further lower borrowing costs.

Darling said the Treasury would indemnify the Bank against any losses on the asset purchase facility (APF) in what was seen as a radical decision.

Officials referred to it as “unconventional policy”. More colloquially it was described as the “nuclear option”.

Darling authorised up to £150bn of purchases. “In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels,” he said.

This was rapidly used up, so he signed off more. By the end of the year QE reached £200bn.

This scale creep was a sign of things to come.

Initially seen as a short-term emergency response, it became a regular tool of monetary policy, under Mark Carney and then Andrew Bailey at the Bank. Successive chancellors signed off the moves and underwrote the QE expansions, including Osborne, Phillip Hammond and Rishi Sunak.

As it became clear QE was becoming permanent, an opportunity arose.

In 2012, Osborne, in the midst of his drive to bring the deficit down, spotted a giant pile of cash building up at the Bank of England.

The bonds it had bought – amounting to £375bn by the end of that year – were generating a significant income.

The government gilts it bought paid interest into the APF’s coffers. The Bank only paid out the base rate of 0.5pc on the money it had created to buy them. The margin between the two was profit, and the chancellor wanted it for the public finances.

“As the scale and likely duration of the scheme has increased significantly since its inception, it makes sense to normalise the cash management arrangements,” Osborne wrote to King in 2012.

“Holding large amounts of cash in the APF is inefficient.”

George Osborne and Mervyn King
George Osborne wrote to Mervyn King in 2012 to say leaving cash in the Bank's asset purchase facility was 'inefficient' - Alastair Grant - WPA Pool / Getty Images

The Bank started paying over the cash every quarter, and by the time Osborne left Number 11, more than £65bn had been transferred to the Exchequer.

The possibility of future losses was acknowledged – “at some stage it is likely that the cash flows from the APF to HM Treasury will need to be reversed,” Osborne wrote – but they were not considered worrying. The Treasury could make good the cost later.

Taking the cash would not affect those ultimate losses, but it affected the timing of borrowing, the OBR said, holding it down in the short-term and raising it again whenever those losses materialised.

Eight years later, the pandemic put QE on steroids. Threadneedle Street cut the base rate to 0.1pc and bought £200bn of bonds as fast as possible in Andrew Bailey’s first week as governor.

“I am prepared to take whatever further action is necessary to support the economy through the economic crisis,” Sunak, who had just taken over as chancellor, wrote as he extended the indemnity.

QE rose again and again, reaching a peak of £895bn and by late 2022, the Bank had paid £123.9bn in profit to the Treasury under Osborne’s scheme.

But by this stage, interest rates were rising and the Bank had started selling some of its bonds. When interest rates rise, bond prices fall, so it sold gilts for less than it paid for them.

Suddenly the Bank was making a loss. Since its profits had gone to the Treasury, it lacked a significant cash buffer and had to call on the government to stump up.

The OBR expects the Treasury to have to send as much as £10bn per quarter to Threadneedle Street for the foreseeable future.

So far those net profits have been whittled down to around £75bn – if Osborne had not taken the cash, then Hunt would not today be paying money over to the Bank.

The OBR predicts a net loss of more than £100bn by mid-2032, but this could be £50bn higher or lower depending on the path of interest rates.

The Bank argues that its job is not to focus on the cost: it sets policy to meet its inflation target, and besides, says QE boosted the economy and so helped the public finances, despite the cash losses on the bonds.

“The fiscal implications of QE and QT are not simply captured by cashflows between the APF and HMT, but also through the wider impact of the policy on financial conditions and the economy,” the Bank of England said in response to questions from the Treasury Select Committee.

QE “reduced borrowing costs, lowered unemployment, supported the economy and helped stem disinflationary pressures at various points over the past 15 years”, it said.

The Treasury says it cannot intervene in monetary policy without risking worse consequences for the economy.

“The separation of fiscal and monetary policy is a key feature of the UK’s economic framework, and essential for the effective delivery of monetary policy,” a spokesman said.

“That is why it is vital the Government underwrites the Bank of England’s asset purchases so it can meet its monetary policy objectives, including returning inflation to 2pc.”