Rachel Reeves should levy a new bank tax and urge the Bank of England to halt bond sales to reduce the government’s £22bn-a-year losses from quantitative easing, the IPPR thinktank has argued.
In a report called Fixing the Leak, the IPPR’s associate director for economic policy, Carsten Jung, says the Treasury should rein in the costs of QE as public finances are tight.
“What started as a programme to boost the economy is now a massive drain on taxpayer money,” he said. “Public money is flowing straight into commercial banks’ coffers because of a flawed policy design. While families struggle with rising costs, the government is … [in effect] writing multibillion-pound cheques to bank shareholders.”
The emergency policy, first enacted in 2009 during the global financial crisis, involved buying up £895bn of bonds from the UK’s banks and, in exchange, crediting them with reserves at the Bank of England.
The Bank is now winding down QE – a process known as “quantitative tightening” (QT) – by selling the bonds at a rate of £100bn a year, but these sales are taking place at a loss.
In accordance with a promise from Alistair Darling, then chancellor, the Treasury bears the financial risks of QE, so these losses hit the government’s finances.
In addition, the higher Bank of England base rate, now set at 4% to combat above-target inflation, means the Bank is paying out higher interest rates on banks’ reserves than it is receiving on the bonds it holds. In total, these losses amount to a £22bn-a-year hit to the public finances, according to the IPPR.
Jung calls for the Treasury to tax the big banks on their QE-related reserves, saying the profits of the big four have more than doubled since before the Covid pandemic.
He says such a policy could bring in £8bn a year and sidestep the Bank’s objections to a widely mooted alternative known as “tiered reserves”, which the Bank’s governor, Andrew Bailey, has argued could interfere with its job of combating inflation.
The IPPR compares the new bank levy it recommends with a tax on deposits implemented by the Conservative prime minister Margaret Thatcher in 1981, as rising interest rates led to higher bank profits.
Jung said: “A targeted levy, inspired by Margaret Thatcher’s own approach in the 1980s, would recoup some of these windfalls and put the money to far better use, helping people and the economy, not just bank balance sheets.”
With gilt markets consistently jittery in recent months, the report also suggests the chancellor recommends to the Bank that it halt the process of selling off its stockpile of bonds.
The Bank’s nine-member monetary policy committee will decide the pace of QT for the year ahead at a meeting on 18 September.
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Bailey appeared to hint at the Bank’s quarterly monetary policy press conference this month that it would consider slowing the sell-off in the face of volatile long-term bond yields that move in the opposite direction to prices.
“There has been a change in the liquidity of the curve at the long end and that has affected yields,” he said, adding that all options were on the table for the meeting. Yields on 30-year government bonds, known as gilts, were close to a 27-year high this week.
Reeves is known to be considering a range of revenue-raising measures in the run-up to her autumn budget, with rising bond yields and a potential forecast downgrade from the Office for Budget Responsibility expected to wipe out the £9.9bn of “headroom” against her fiscal rules.
A spokesperson for the Bank of England said: “Tax and spending decisions are for the government, not the Bank. We remain 100% focused on making sure that inflation returns all the way to the 2% target, because low and stable inflation is the foundation of a healthy economy.”
A Treasury spokesperson said: “As set out in the plan for change, the best way to strengthen public finances is by growing the economy, which is our focus.”
They added: “The [MPC] has operational independence to set monetary policy, including how it approaches asset sales, which is essential for the effective delivery of monetary policy.”
