Treasury to hand Bank of England £130bn in next five years in stealth subsidy to bankers

The Treasury will be handing the Bank of England over £130bn by 2030 to help pay a stealth subsidy to bankers, money that could fund over half a million new social homes, the New Economics Foundation has warned.

Latest figures on central bank losses last week [Tuesday 11 February], show the Treasury is set to pay the money to the Bank to cover its losses on interest payments and quantitative tightening (QT) which boost the financial sectors profits. The payment is due because the interest the Bank earns on bonds bought from quantitative easing is now lower than the interest paid on reserves used to buy the bonds in the first place.

It comes at a time when Chancellor Rachel Reeves is reported to be considering making cuts to government departments in the spending review set for June.

The New Economics Foundation has argued that a system of tiered reserves could reduce interest paid towards the banking sector up to £11.5bn a year by requiring them to hold a portion of reserves that are unremunerated. Slowing QT by halting active sales could save a further £13.5bn per year. Furthermore, reforming the relationship between the Treasury and the Bank, so the Bank absorbs more of its own losses, could save over £26bn per year.

Dominic Caddick, economist at the New Economics Foundation, said:

“The Chancellor’s self-imposed fiscal rules are clearly putting false constraints on public spending and the Bank of England is actively making this situation worse by putting the Treasury under undue financial strain.

“There are multiple ways out including reducing the cost of reserves by adopting a tiered system as seen in the eurozone or slowing down the speed of quantitative tightening. Furthermore, updating the indemnity agreement agreed over a decade ago for a new context is entirely reasonable.

“We should question why the Bank can’t absorb its own losses as is the case in the US and Europe. Continuing to burden the Treasury will only keep the Bank in the political spotlight, threatening its independence.

“Reforming the system now could unlock billions of public spending, avoiding needless austerity while creating a fairer monetary system.”

ENDS

Notes

Contact

James Rush – james.rush@neweconomics.org

Notes

The Bank of England’s indemnity is set to charge the Treasury £130bn from 2025 – 2029 or £26bn per year on average according to the Bank of England’s latest Asset Purchase Facility Quarterly Report — 2024 Q4

540,000 social homes could be built for £116.88bn according to NEF calculations that currently to build 90,000 homes requires £19.48bn in grant funding.

It has been widely reported that the Treasury is looking to make public spending cuts across government departments at the spending review, due to conclude in June

NEF has previously calculated tiering reserves with reserve requirements used in the UK’s history could save up to £11.5bn a year and halting active sales on QT could save up to £13.5bn a year. However, these figures would interact with each other if both adopted so cannot be simply added up for a total saving.

Furthermore, reforming the indemnity would mean the Treasury does not immediately have to cover the Bank of England saving up to the entire £26bn a year as above.