LONDON — British bankers, beware! The man you tried to debank last July for political reasons is eyeing a raid on your profits.
Nigel Farage, who’s back as party political leader of Reform UK, wants to give Britain a £40 billion tax cut — and he thinks he’s found a way to make the country’s lenders pay for it.
But the move to shave the eye-watering sum off the banks’ bottom lines — slated to fund an increase in workers’ income tax thresholds to £20,000 from £12,570 — wouldn’t take the form of a direct windfall tax on banks.
Instead, Reform is eyeing a stealth levy. In an announcement on Monday, the party — currently polling third as the U.K. prepares to vote on July 4 — said it would raise the funds required to pay for its proposed tax cut by restructuring the way Bank of England pays interest on reserves.
While the party is unlikely to reach power when Britain heads to the polls, the policy gives an idea of what kind of opposition the future government will have to contend with.
And it’s an unsurprising target for Farage, who was ditched by the U.K.’s most prestigious bank, Coutts, last year, for his political opinions. It also sets the outspoken Brexiteer apart from the main political parties, which unlike him, are finally supporting the City.
The BoE burden
Reform is not alone in identifying central bank remuneration as a public burden. The Treasury Committee‘s inquiry into quantitative tightening has also addressed the issue at length this year.
In its final report, the committee laid out why it thinks 15 years of extraordinary monetary policy and associated asset purchases — which contributed to a record Bank of England balance sheet and asset portfolio in 2022 — are now undermining fiscal authority.
A key problem the Treasury faces is that a Bank Rate of 5.25 percent means the income the BoE receives from its investments is much lower than what it has to pay banks on their deposits. While those investments are in the process of being sold off, it’s still costlier than ever for the Bank to combat inflation by holding interest rates high, a fact that is now contributing to losses.
The BoE is not the only central bank to incur losses because of this situation. But a unique indemnity agreement between it and the Treasury means it’s one of few central banks in the world that requires them to be covered by the taxpayer.
Thus far, the indemnity has required some £50 billion to be transferred from the Treasury to the BoE, although that has to be offset against over £120 billion in income that the BoE transferred to the government in the first 12 years of the program.
“Journalists were not writing articles about this when we were paying money to the Treasury,” BoE Governor Andrew Bailey observed wryly in a speech at the London School of Economics in May.
Overall, the Bank estimates it will make a loss of £85 billion on the program by the time it winds down the Asset Purchase Facility completely.
The transfer of those funds has unsurprisingly become a hot-button issue, with many politicians and pressure groups, among them the Conservative Way Forward group and the Tax Justice Network, all of whom argue the circumstances now justify government action.
Tiers for fears
But changing how the central bank pays interest on its reserves is a controversial idea.
The Bank of England is an independent body that is uniquely responsible for setting the rate it pays on bank deposits as part of its monetary policy. Any move to influence how the institution sets rates could thus be deemed an attack on its independence, with potentially seismic implications for the government’s borrowing costs — and consequently for household and business borrowing costs too.
This is a lesson former prime minister Liz Truss learned when her unfunded mini-budget clashed with the BoE tightening policy in 2022, spooking gilt markets in a way that forced the Bank to step in and restore order.
Rather than ripping up the indemnity directly, as some politicians propose, Reform says it would counter the negative effects of an expanded balance sheet by “ending the BoE’s current voluntary payment of base rate interest on the printed money reserves, known as quantitative easing (QE).”
In practice, Reform’s proposals would introduce a tiered remuneration system for banks, penalizing only that share of reserves deemed to be a QE-free lunch, echoing a proposition former deputy governor Paul Tucker made in October 2022.
Reform, however, did not spell out what powers it would use to force the Bank of England to impose such changes.
BoE Governor Andrew Bailey has firmly rejected calls by lawmakers for the central bank to impose such changes voluntarily. He told the Lords Economic Affairs Committee in February the move would hinder the ability of the BoE to steer market rates effectively and “is a pretty substantial change and not one that I would currently advocate”.
Without the governor’s cooperation, any prospective government would need to change the Bank’s formal remit to enact the policy.
Reform’s BoE interventions don’t stop there though. As a result of its quantitative tightening policy, the Bank is currently selling large numbers of assets at a loss. Reform would rather if the Bank waited for them to mature so that their face value could be returned fully.
Unless QT stops immediately, Reform said, the BoE will incur another £50 billion of losses, matching the £50 billion it has already incurred from the policy in 2023.
“I have been raising this for over 12 months,” said Reform chairman and former asset manager Richard Tice. “The fact that neither the Chancellor, nor the Treasury, nor the Bank of England have proved why I am wrong, but instead have been silent on this issue, is because they are embarrassed to admit that I am right,” he said.
Not everyone was convinced, though. Despite being name-checked by Tice in the press statement, Paul Johnson, director of the Institute for Fiscal Studies, distanced himself from the policy, saying it would raise “much less than half” of the £40 billion proposed, and even then only for a short while, as the amount saved would fall as the BoE cuts rates further.
“The many tens of billions of tax cuts proposed would, therefore, need to be funded by definite tax increases or spending cuts elsewhere before long,” Johnson said via X.
The Bank of England declined to comment.
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