Last October we highlighted the first - of what we said at the time was likely 'the first of many' - bailout transfer payment from the UK Treasury to The Bank of England to cover its QE losses.
That amount was just over £11 billion ($12.4 billion).
Things have escalated since...
The FT reports today that The Bank of England has estimated it will require the Treasury to transfer a total of £150bn by 2033 to cover expected losses on the central bank’s quantitative easing program, up from a previous calculation of £100bn.
The transfers represent both the continuing cash flow losses on the QE scheme - under which the BoE bought large volumes of gilts - as well as gains or losses made by the central bank when bonds mature or it sells the assets.
Under an indemnification agreement between the Bank and the government, the Treasury is responsible for all profits and losses made under the quantitative easing program, which had previously generated tens of billions of pounds for the government when interest rates were at historic lows.
Between 2009 and 2022, the Bank estimates that bond holdings raised a cumulative £124 billion for the Treasury. The government makes payments to the Bank to cover its losses.
Once again the taxpayer takes it on the chin...
In forecasts published at the March Budget, the Office for Budget Responsibility estimated that losses over the remaining life of the QE scheme would result in a cumulative net loss of £63bn.
Jagjit Chadha, director of the National Institute of Economic and Social Research, a think-tank, said it was “increasingly clear” that losses on the BoE QE scheme would act as a constraint on fiscal policy in any pre-election Budget as they were now larger than the UK fiscal watchdog had factored into its forecasts.
In the short term, the BoE expects the Treasury to transfer about £40bn in each of 2023, 2024 and 2025.
This is equivalent to about 4 per cent of gross domestic product, and about £10bn more each year than the BoE was anticipating in April, suggesting the government will face additional pressures on the public finances in the run-up to the next election.
The situation in the UK is apparently different to that in the US as while The Fed typically remits its operating profits (on interest income from the bonds on its balance sheet and from fees for services provided) to the US Treasury (under Federal law). That money becomes part of the federal government’s operating budget. In other words, the central bank serves as a revenue source for Uncle Sam.
As we noted previously, in 2021, The Fed reported a net income of $107.8 billion and sent $107.4 billion to the US Treasury.
But it is possible for the Fed to lose money. In fact, it will likely do so in 2023. If so, it would be the first operating loss since 1915.
However, unlike in the UK, while the US government will see a reduction in revenue which will increase the federal budget deficit, we live in a world where the Fed gets to make its own accounting rules. And according to its own accounting rules, any net loss magically turns into a “deferred asset.”
Maybe the BoE and UK Treasury need to take some notes...
