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The Bank of England creates new central bank reserves and uses them to buy government bonds (gilts) from pension funds, insurers and other financial institutions.
1
As a result, gilt prices rise and yields fall, so the government can issue new debt at lower interest rates.
gilt yield
gilt yield
Assumes: QE lowers yields.
But: Yields were already low for global reasons, so the saving owed to QE alone is uncertain.
2
This means debt interest payments are lower than they would otherwise be.
debt interest
debt interest
Assumes: The government issues or refinances debt while yields are low.
But: Index-linked gilts rise with inflation, so if QE adds to inflation, some debt costs go up instead.
3
In addition, while Bank Rate was below the yield on the gilts it held, the Bank made a profit on them, which was passed to the Treasury.
Asset Purchase Facility
Asset Purchase Facility
Best link to attack
Assumes: Bank Rate stays below the yield on the gilts held.
Assumes: Bank Rate stays below the yield on the gilts held.
But: Once Bank Rate rose above that yield from 2022, the scheme made losses that the Treasury has to cover, reversing the earlier gain.
4
Consequently, by supporting growth, QE raises tax receipts and reduces spending on unemployment-related benefits.
automatic stabilisers
automatic stabilisers
Assumes: QE boosts growth.
But: If QE does little for growth, there is little fiscal gain from this route.
End
The budget deficit is smaller than it would otherwise be, while interest rates stay low.
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Questions this answers
- Explain how quantitative easing might affect the government's finances.
- Assess the costs to the taxpayer of quantitative easing and quantitative tightening.
- Discuss the relationship between monetary and fiscal policy.
Diagram
No standard diagram. Figures on debt interest or the Asset Purchase Facility's transfers to the Treasury make good evidence.
Reverse and related
Quantitative tightening → selling gilts at a loss → cost to the Treasury.