LONDON (Reuters) -Britain’s government should tax banks on the billions of pounds they receive in interest from the Bank of England on the reserves they hold at the central bank, a think tank recommended on Friday.
Around 22 billion pounds ($29.7 billion) a year, which goes to the banks as a result of the BoE’s bond-buying programme, represents a subsidy to the lenders at the expense of public services, the Institute for Public Policy Research said.
Echoing calls made by other commentators in recent years, the IPPR said a new tax on the interest the banks receive would give finance minister Rachel Reeves more room to meet her fiscal rules.
Reeves is widely expected to increase taxes again in her autumn budget – after raising them on employers in her first budget last year – as she is believed to be off course to hit the fiscal rules.
“What started as a programme to boost the economy is now a massive drain on taxpayer money,” Carsten Jung, associate director for economic policy at IPPR, said. “Public money is flowing straight into commercial banks’ coffers because of a flawed policy design.”
British banks hold hundreds of billions of pounds of reserves at the BoE, largely as a result of the central bank’s quantitative easing – or bond-buying – that was launched during the 2008-09 global financial crisis.
Banks are paid interest on the reserves at whatever is the BoE’s current interest rate which is higher now than during much of the QE programme. Losses to the central bank are covered by the Treasury and ultimately tax-payers.
BoE Governor Andrew Bailey has said the current system is essential to transmit changes in the BoE’s official interest rate through to the wider economy.
In June, Bailey again defended the central bank’s programme of government bond purchases and sales after it came under fire from some politicians – including from within Brexit campaigner Nigel Farage’s Reform UK party – for its cost.
In May, Bailey and Reeves raised the prospect of the BoE making money from its new system for providing reserves to banks after racking up huge losses from its bond-buying programme.
Calls for a rethink of the system date back years. Former BoE deputy governor Paul Tucker said in 2022 the government should review the policy of paying interest to banks.
($1 = 0.7402 pounds)
(Writing by William Schomberg; Editing by Kate Holton)
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