Reeves has been captured by Bank of England orthodoxy
Ahead of her spending review on Wednesday, Chancellor Rachel Reeves faces a set of national accounts drenched in red ink.
But Nigel Farage's upstart Reform party has a plan which, at a stroke, will apparently bring about a multibillion-pound improvement, paving the way for higher public spending without more borrowing and even allowing for tax cuts.
Richard Tice, Reform's deputy leader, has this weekend written an explosive letter to Bank of England Governor Andrew Bailey, accusing the UK's central bank of 'systemic misuse of taxpayers' money ... at a time when the nation's accounts are already under very severe pressure'.
Despite the sud den resignation of chairman Zia Yusuf and Labour's victory in last week's Hamilton by-election, Reform has come out fighting.
Still leading in most opinion polls, the party has launched a broadside against the financial establishment, publicly claiming the Bank of England 'is unnecessarily wasting tens of billions of pounds of taxpayers' money, whilst enriching City institutions'.
Tice's letter to Bailey focuses on the merit of interest payments made on balances held at the Bank of England, resulting from the UK's 15-year-long quantitative easing (QE) programme.
The detail behind these issues is understood by just a few – expert policymakers, specialist investors and a handful of overly curious economic commentators.
But Reform's now boldly stated policy aim of forcing the Bank of England to stop paying interest to commercial banks on QE reserves, resulting in potential savings of £35bn per year, is not outlandish.
I believe it should be taken seriously and openly debated – as do a range of widely respected, politically agnostic economists, including two former deputy governors of the Bank of England.
Public sector net borrowing for the financial year ending March 2025 was £151.9bn, a massive £14.6bn above the Office for Budget Responsibility's (OBR) forecast and £20.7bn more than the previous year.
With public sector net debt at £2,770bn – equivalent to 97.2pc of GDP, the highest ratio since the early 1960s – the Government is making annual interest payments of £105bn, which is the schools and transport budget combined and almost twice what it spends on defence.
But with Reeves facing competing spending demands from all departments and Labour Left-wing activists out to get her, Reform's policy of ending obscure interest payments buried deep in the national accounts, barely recognised and even less widely understood, could unlock serious money – an average of some four times the fast-diminishing £9.9bn of fiscal headroom she has allowed for 2028/29, each and every year for the rest of this parliament.
This is why Tice has written this public letter now, piling pressure on a desperately cash-strapped Chancellor who has already pointed to the 'dangers' of curtailing these interest payments, accepting the Bank of England's self-serving arguments against change, just as she swallowed whole the Treasury's long-cherished idea of scrapping of winter fuel payments that has turned out to be politically disastrous.
QE was launched in response to the 2008 financial crisis, as the Bank of England 'printed' virtual money to try to revive the UK economy. Threadneedle Street created balances 'ex nihilo', using them to buy government bonds (known as gilts) from investors, mainly commercial banks, in an attempt to drive down borrowing costs.
Those banks then parked the cash they received for their gilts back at the Bank of England, helping to stabilise their own balance sheets and the broader financial system, while earning the 'base interest' on those deposits.
When rates were just 0.5pc following the financial crisis and 0.1pc during the Covid lockdown, the Bank earned far more on returns from gilts than it paid commercial banks in interest, reaping handsome profits which were duly passed on to the Exchequer.
But when QE inevitably led to inflation, interest rates started rising – especially over the past few years, up above 5pc. And that has resulted in big losses on QE balances, which the Government is obliged to indemnify, with some £85.9bn being transferred from the Treasury to the Bank since the end of 2022.
Even more controversially, the profits of commercial banks have since then been much higher than before Covid – with some of the same institutions perceived to have helped cause the financial crisis making money years down the line, again at taxpayers' expense, from the very emergency measures designed to clear up the mess.
And on top of that, as Tice points out in his letter, the Bank has also been selling its stockpile of gilts back to the market – so-called quantitative tightening (QT) – crystallising billions of pounds of losses for the taxpayer.
Again, many serious economists think this is a mistake, with some of the bonds bought during times of genuine distress now being sold at knockdown prices.
'Once again this is a voluntary decision by the Bank of England, that is imposing tens of billions of pounds of unnecessary losses on the taxpayer,' wrote Tice to Governor Bailey. 'QT is also partly responsible for keeping gilt yields higher than they otherwise would be, resulting in even more punitive interest costs, imposing yet more strain on the Government's profit and loss account,' Tice continued.
He is right.
And, of course, the Bank decided to begin its QT programme just a couple of days before Liz Truss's 'mini-Budget', piling pressure on government debt markets by flooding them with additional gilts, just as a Tory prime minister was launching policies designed to scale back the size of the state.
The timing of that decision, at the very least an important contributory factor in the chaos which ensued, is almost never remarked upon. It certainly will be if the political and media class, at Tice's behest, now becomes seriously interested in the inner workings of the Bank of England's balance sheet.
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