Reeves’ “Shoddy” Gilt Market Analysis Mocked by Treasury mdi-fullscreen

We are at that stage of the political cycle where newspaper editors start to temper their usual criticisms of the opposition. A prime beneficiary of that has been Rachel Reeves, whom we now learn in fawning profiles is some kind of chess wunderkind as well as a fiscally conservative former Bank of England economist. All sagacious commentary now paints her as the safe pair of hands Britain needs from its first woman Chancellor of the Exchequer.

Which made her press release this week about “Rishi Sunak’s failure to heed warnings on debt issuance costing taxpayers £56 billion” extraordinarily embarrassing. It was a bit technical, and no doubt this was deliberate to demonstrate her mastery of arcane financial matters. The press release in her name claimed:

In October 2020, the Institute for Fiscal Studies warned Sunak that – given the large sums being borrowed during Covid-19 – the “costs of financing it just slightly wrong will be large.”

They said that the way to tackle that risk was to sell more long gilts, in other words: use a longer term, lower cost borrowing approach that would have protected public money more from sudden spikes in interest rates.

Instead, Sunak opted for a short term, high risk approach, which has left the UK exposed to inflation going up, building up substantial costs down the line.

Because of the then-Chancellor’s choice to ignore those warnings, it means that the UK now issues far more index-linked gilts than other G7 countries*, over twice as much as a share of the second-placed country which is Italy.

There are a number of problems with this argument. The first and most problematic of which is that the IFS actually recommended issuing longer dated index-linked gilts. The reason for this is that the gilt market would not be able to absorb issuance on the scale of the covid borrowing that was not index-linked. This would be obvious to anyone with a basic knowledge of government debt markets.

In any case the Debt Management Office, an arm’s-length branch of Treasury which is in constant touch with the gilt market, advises on what maturities the market can absorb. It’s not done by the Chancellor having a guess at what might work. The idea that £400 billion of gilts could have been issued at the prevailing low rates at the long end without the rate moving suggests a basic failure to understand how markets function and how prices move with supply and demand. Responding to her claims, Economic Secretary to the Treasury Andrew Griffith is blunt:

“Rachel Reeves and Labour have completely misunderstood the expert advice they are quoting. The only thing Labour understand about debt, is how to increase it.”

Another Treasury source was equally condescending, chortling that it was “hilariously shoddy analysis from the kids at Labour HQ”.

*The Tories have come up with seven specific questions for Rachel Reeves to answer on the Labour Party’s amateur debt analysis:

1) All UK Government debt is issued subject to the advice of the Debt Management Office. Are Labour saying they would have ignored the advice of the Debt Management Office which was established by a Labour government in 1998?

2) If yes, would Labour look to abolish the Debt Management Office, reducing independent oversight of the UK debt market?

3) The Institute for Fiscal Studies report referenced in Labour’s analysis, calls for more index-linked gilts, despite Labour using it to argue the opposite. Can Labour confirm if this is a misquotation or a misunderstanding of the IFS report?

4) Labour’s analysis assumes additional index-linked issuance would not have been necessary ‘if more of 2020-21 issuance had been long’. Can Labour provide the analysis that proves this?

5) The UK Government issues more inflation-linked gilts than international comparators because the structure of our pension system relies less heavily on state-backed pensions. Are Labour therefore committing to spend billions increasing the number of state-backed pensions?

6) Is Labour saying that it would not issue index-linked gilts, destabilising the markets?

7) Higher inflation is why index-linked gilts yields have risen. Please, provide Labour’s full plan for getting inflation down to the Bank of England’s two per cent target?
Somebody in her office should deservedly get the hair-dryer treatment…

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mdi-account-multiple-outline Andrew Griffith Rachel Reeves
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