Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment his Department has made of the potential impact of reducing the amount of issue index-linked gilts on financial markets.

Index-linked gilts are planned to account for around 11% of gilt sales in 2023-24. The government’s decisions on the amount of index-linked (and conventional) gilt issuance are taken as part of the annual financing remit, and in consultation with market participants. In practice, the share of total issuance will vary from year to year depending on factors including the size of the financing requirement, demand, and market conditions.

Index-linked gilts remain a key part of the UK’s financing programme, as they have for over four decades. They have historically brought cost advantages for the government due to strong demand from, for example, the domestic pension fund industry, and they continue to do so based on current inflation expectations implied by the difference between nominal and real yields.

At Budget 2018, the government announced that it would look to reduce the proportion of index-linked gilt issuance in a measured fashion over the medium term, to manage the inflation exposure in the debt portfolio. Since then, the proportion of index-linked gilts in the debt portfolio has fallen from 28.4% at the end of 2019 to 25.3% at the end of 2022. As set out in the 2022-23 Debt Management Report, the government is no longer looking to reduce index-linked gilt issuance as a share of total issuance on a year-on-year basis over the medium term. The 2023-24 financing remit is consistent with this.

The proportion of index-linked gilts in the government’s wholesale debt portfolio remains consistently higher than across the G7 group of advanced economies and is around twice as large as the second highest G7 country. This is largely owing to the high level of structural demand in the UK, as a number of institutional investors hold index-linked gilts to hedge long-term inflation-linked liabilities.

The government does not comment on specific financial market movements. Real yields have been low by historical standards over the last decade. It is normal for the yields of index-linked (and conventional) gilts to vary when there are wider movements in financial markets. The government is ultimately a price-taker, with the price of government debt determined by the market.