Jeremy Hunt MP, Chancellor of the Exchequer (Photo by Christopher Furlong/Getty Images)

Did QE cost taxpayers?

Claims that the Bank of England’s programme cost billions are a red herring


This article is taken from the June 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

So many monetary policy decisions have been wrong in the last few years, it is not surprising that politicians and journalists spend time looking out for yet another cock-up.

According to numerous media reports, the Bank of England’s programmes of “quantitative easing” are “costing the state” — and hence “the taxpayer” — many tens of billions of pounds. An apparently well-informed demand is then made for a major rethinking, or even the permanent abandonment, of QE-type activities.

This is a herring of the deepest vermilion.

The essence of QE operations was that the Bank of England borrowed money from the commercial banking system (by adding to its cash reserves) and used the proceeds to purchase government securities (sometimes known as “gilt-edged securities”, or “gilts”) from non-banks.

The effects were to add to both the stock of gilts on the Bank’s balance sheet and the bank deposits held by the non-banks. As people make payments from their bank deposits, the deposits are part of the quantity of money. So the quantity of money increased, with positive effects on economic activity.

It follows that QE can be a sensible and legitimate method of preventing a deep recession. The potential virtues of QE were recognised by John Maynard Keynes when in 1930 in his Treatise on Money, he advocated (what he called) “monetary policy à outrance”. He wanted to fend off the then looming American Great Depression. Keynes’ “monetary policy à outrance” was much the same thing as QE.

But what about the gilts kept by the Bank of England in its “Asset Purchase Facility”? As the securities are traded every day, they have a market value. Britain has had two phases of QE, one for a few years from March 2009 during and after the Great Recession, and the other from March 2020 in response to the supposed depression risks posed by the Covid-19 medical emergency.

In the early quarters of both episodes the market value of the Bank’s gilts increased. But, with the inflation flare-up of late 2021 and 2022, gilt yields have soared and the securities have fallen heavily in value.

The notion of economic detriment is meaningful only if actual resources have been wasted

The media allegation is that the losses — now much larger than the earlier profits — are “a cost to the taxpayer”. For this reason alone, it is implied that the Bank of England’s asset purchases were a mistake.

Not so. True enough, the accounts prepared for the Asset Purchase Facility may show the sequence of profits and losses just discussed, and profits and losses have therefore been recorded as entries on a balance sheet. It is also correct that — under the terms of correspondence between the Bank and the Treasury — the Bank has an indemnity requiring the Treasury to make good any such losses, which led to a “payment” last year of £38 billion.

But let us be clear. The Asset Purchase Facility belongs to the Bank of England, which in turn belongs to the state. His Majesty’s Treasury is also an agent of the state. So the £38 billion payment is from one agent of the state (HMT) to another agent of the state (the Bank of England), and no one — certainly not the taxpayer — is worse off.

The notion of economic detriment is meaningful only if resources — raw materials and components, person years of labour input, and the depreciation of capital — have been misused or wasted. Politicians and journalists are to be thanked when they bring attention to misdirected public expenditure.

But resource costs and accounting entries are different things. An accounting entry may be enormous, into the tens of billions of pounds, but have no significance in resource terms. As is the case here, it does not signal that someone — anyone — is worse or better off. The £38 billion was an accounting entry, not a measure of resource cost.

Despite the obvious cogency of the point being made, the Treasury Committee of the House of Commons has asked about the “value for money” of the Bank’s QE operations, whilst the House of Lords’ Economic Affairs Committee has suggested that the letters about the Bank’s indemnity should be made public.

The official response has needlessly kept the subject alive. The Chancellor, Jeremy Hunt, turned down the idea of publishing the correspondence about the indemnity. The Bank of England’s response was even more dismissive, that enquiries about the topic were “uninteresting”.

Bluntly, the tendency of the current vintage of financial officialdom (Hunt, Andrew Bailey et al.) to clam up when asked controversial questions is further evidence that they are not of the same calibre as previous vintages (say, Norman Lamont or Kenneth Clarke,and Eddie George in the 1990s). The easiest way of ending the nonsense about taxpayer losses on QE is to publish everything about these matters and invite public discussion.

When Keynes wrote about the subject in 1930, the Bank of England was privately owned, and the Bank was understandably reluctant to embark on the operations he favoured, because any losses would be to its shareholders. But the Bank is now state owned, and the losses and profits which arise from its holdings of government securities cancel out as far as the state is concerned.

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