Bank of England: National Debt

Monday 24th June 2013 Lords Chamber

Question

15:01

Asked by

[Lord Williams of Elvel]

To ask Her Majesty’s Government what proportion of the national debt is currently held by the Bank of England.

[Lord Newby]

My Lords, Bank of England data state that the Bank of England’s asset purchase facility currently holds £326.3 billion of gilts by nominal value. This was equivalent to 24.1% of the total stock of gilts and Treasury bills at the end of March 2013.

[Lord Williams of Elvel]

My Lords, if the Minister were to consult Wikipedia, he would see that the figure is rather higher. Something like a third of the national debt is now owned by the Bank of England. Given this, does the Minister agree that in time this position must be unwound, and how will this be achieved?

[Lord Newby]

My Lords, this measure was taken to deal with the heart attack suffered by the British economy and over a period it will be unwound. This is a matter for the Monetary Policy Committee of the Bank of England to manage. At the point at which it feels it right to start unwinding, no doubt it will explain how it plans to do it.

[Lord Sharkey]

My Lords, the Prudential Regulation Authority has said that the banks must raise an additional £27 billion in capital. Will the Minister tell the House how the Government intend to make sure that this increase in capital requirements will not lead to further reductions in lending to SMEs?

[Lord Newby]

My Lords, the Government are not responsible for the way in which banks may or may not raise capital. We are very keen for the banks to continue to lend money to SMEs and, indeed, to increase the extent to which they do it. One way in which we hope that this will happen is through increased competition in the banking sector. We hope that current trends in some aspects of that, with some of the new smaller banks lending to SMEs, will continue.

[Lord Barnett]

My Lords, does the Minister recall that in 2010 the Chancellor forecast that the total national debt as a percentage of GDP would start to fall in 2015? He later changed that to 2018. Now that forecast might need to be altered, given the review that he will announce on Wednesday, and further cuts. When does the Minister expect the national debt itself to start falling?

[Lord Newby]

My Lords, the noble Lord is right to say that the point at which the national debt will fall as a proportion of GDP has been pushed out by a couple of years. The statements made at the Budget showed that we still believe that it will happen in 2017-18, and the spending round being announced later this week is designed to ensure that we meet that target.

[Lord Higgins]

My Lords, can my noble friend explain how this process of unwinding is to take place? Does he mean that the Bank of England will sell back the same gilt-edged securities to the market and, in that case, are they likely to have the right degree of duration and so on?

[Lord Newby]

My Lords, at Question Time with less than three minutes to go, I cannot give a very detailed description. The key point is that the Monetary Policy Committee is committed to working with the Debt Management Office to make sure that, as and when the present situation is unwound, that takes place in an orderly manner so that we do not have undue volatility in the market.

[Lord Eatwell]

My Lords, what contingency has the Treasury made for repaying to the Bank of England the revenues it currently receives should the Bank incur a loss on its bond holdings?

[Lord Newby]

My Lords, the Treasury has always accepted that it might find itself paying back money to the Bank of England. The noble Lord will be aware that the original situation was that the Bank was buying Treasury bills and collecting interest on them. The Treasury was paying the interest to the Bank, which was then sitting on the interest. What we have done, in line with America and Japan, which have broadly the same scheme, is ensure that that money, which amounts to some £19 billion to date, has been transferred back to the Treasury. We have always accepted that there could be a reverse flow as bills are sold back into the market or expire, but that will take place over a significant period. We believe that it is sensible to operate in that way.

[Lord Lawson of Blaby]

My Lords, following the supplementary question from my noble friend from the Liberal Democrat Benches, can my noble friend the Minister confirm that the requirement on banks to raise more capital will in no way reduce the amount of lending to SMEs? That is just special pleading by the banks. In fact, more capital will be enabled to be lent to SMEs. While he is on his feet, can he also confirm that a good bank/bad bank split of the Royal Bank of Scotland Group as soon as possible would also greatly assist more lending to SMEs?

[Lord Newby]

My Lords, the noble Lord’s views on the good bank/bad bank split are well known. As he knows, the Treasury is now looking at that. We are hopeful that as economic conditions improve, lending to SMEs will increase in any event, but I have been surprised over the past three years by the extent to which the views of the banks about the demand from SMEs for lending have not been matched by the self-professed requirements of SMEs. I think that at every stage the banks could and should have done more.