The Plunge in Value of Treasury Bond Fund Could Cost UK Households £8,900 Each
The Opposition has accused the government of “complacency” and “recklessness” after it was revealed that the value of a Treasury bond fund has gone from a £73.6bn asset in 2020 to a £177.6bn liability. Labour claims that this could cost £8,900 for every household in the UK.
The fund in question is called the Asset Purchase Facility, which is administered by the Bank of England and was launched in 2009. As recently as 2020, it was a £73.6bn asset on the government’s balance sheet. However, due to rising inflation and interest rates, as well as the disastrous mini-budget under Liz Truss and Kwasi Kwarteng’s leadership, the fund’s value has plummeted to become a £177.6bn liability. This represents a cumulative loss of £251bn.
If the entire fund was cashed out now and the losses realized, the liability sum would be equivalent to a cost of £8,900 per UK household. This amount is 76 times the money lost by Sir John Major’s government on Black Wednesday in 1992 when the UK was forced out of the Exchange Rate Mechanism. It’s important to note that the money has not actually been lost or paid out; it is the fund’s value that has plunged.
Labour has accused the government of “slipping out” the news of the “bond black hole” on 20 July, the last day before parliament went off on its summer recess, and also the day of three crucial by-elections.
The Creation and Purpose of the Asset Purchase Facility
The Bank of England created the Asset Purchase Facility to support its quantitative easing program in response to the 2008 financial crisis. During this time, the Bank bought billions of pounds worth of government bonds and other assets from banks, pension funds, and other finance companies. This provided a crucial source of cash liquidity in an otherwise frozen market.
As the economy recovered, the value of the assets rose, and then-Chancellor George Osborne changed the rules to ensure any profits from the fund flowed back to the Treasury. However, any losses made by this Bank of England fund are insured by the Treasury, meaning the taxpayer would be responsible for any cash losses.
With soaring inflation and rising interest rates since the COVID pandemic, the value of the fund has fallen dramatically. The Treasury’s annual report also states that the impact of Kwasi Kwarteng’s mini-budget contributed to the drop in value.
Labour’s Accusations and Response from the Conservative Party
Labour’s shadow chancellor, Rachel Reeves, has accused the government of leaving the public facing “yet another hit” during the cost of living crisis, thanks to “catastrophic mistakes in managing this fund.” She believes that the Tory bond black hole will burden working people with another astronomical bill for years to come.
In response, economic secretary to the Treasury Andrew Griffith said that the only black hole facing the British people is the £90bn unfunded spending splurge that Labour would impose on families across the country. He emphasized the difference between movements in a long-term bond portfolio and the certainty of a Labour government spending other people’s money until there is no money left.
Griffith also highlighted the progress being made on the British people’s priorities, such as halving inflation, growing the economy, and reducing debt.
Overall, the plunge in the value of the Treasury bond fund has raised concerns about the financial impact on UK households. Labour has criticized the government for its handling of the fund, while the Conservative Party has defended its economic policies.