The expected level of write-offs associated with different parts of the Government's loan book affects how they are recorded by the ONS in the public finances. In this box we reviewed the effect which the valuation methodology used by the ONS for different elements of the loan book has on PSNFL.
The ONS records £311.4 billion of loan assets held by the public sector at the end of 2024-25. This represents 21.3 per cent of the assets included within PSNFL. Of these, £90.8 billion are assets held by the Bank of England within the TFS, with the remainder largely government assets.
The Government makes loans with differing objectives and risk preferences, including many loans that for policy reasons are made at a subsidised rate relative to that which would be offered by the private sector.a This increases the risk of incurring losses where the interest earned is insufficient to cover the cost of writing off any loans that default, as well as covering the costs of debt issued to finance the initial loan outlay. As set out in paragraph 3.18, some loan assets are likely to be overvalued in PSNFL as the risk of losses means the loans are worth less than their nominal value, which in many cases is how they are currently valued in PSNFL.
In some cases, the ONS already takes a different approach to the valuation of loans to recognise this risk. For student loans, the largest portion of the central government loan book, the ONS partitions the nominal value of the loan into:
- an asset, which represents the proportion of the loan which it expects to be repaid and is therefore counted as an asset within PSNFL. This estimates the real value of the loan.
- a capital grant, which is the proportion of the loan which it expects to not be repaid. This is currently forecast to be £40.4 billion (30.8 per cent of student loan outlays) across the latest five-year forecast, with both PSNB and PSNFL increased by this amount.
Other important portions of the loan book are currently recorded at nominal value by the ONS. This means that losses are only recorded when loans are written off, which could be many years in the future. However, the ONS has recently published updated guidance on how it will record the loan books of development banks in future, with treatment differing based on the extent of write-offs expected:b
- The NWF holds £473 million of loan assets, for which it expects credit losses of under £20 million.c This suggests a relatively low share (under 4 per cent) of its loans are expected to be written off and that the nominal value of loans recorded by the ONS should accurately represent the economic value of the asset. In our forecast we therefore recognise losses when they are expected to occur.
The BBB currently expects that between 30 and 40 per cent of its £169 million portfolio of start up loans will be written off, meaning that using a nominal valuation would likely overvalue the asset (which has a significantly lower economic value).d This more material risk of expected losses means that the ONS will partition these loans into a loan asset and a capital grant, as it does with student loans. We will reflect this in our next EFO and continue to review our forecast methodology across the Government’s loan book to ensure it is consistent with the ONS’s valuation of loans and adequately captures the risks around differing valuation treatments.
This box was originally published in Fiscal risks and sustainability – July 2025