The Treasury should bring in a new tax on commercial banks to address the unintended consequences of quantitative easing (QE), says the Institute for Public Policy Research (IPPR).
The UK taxpayer is spending £22 billion a year compensating the Bank of England for losses on its QE programme, public money which is partly being funneled to commercial bank shareholders.
The think tank says that this subsidy of commercial banks, at the expense of public services, is boosting bank profits while millions face the cost-of-living crisis. Since interest rates began rising in December 2021, the four largest UK banks have seen their annual profits more than double, up by £22 billion compared to pre-pandemic. IPPR says that some of this is a direct transfer of funds from the taxpayer to shareholders.
Under the current set-up, the Treasury pays the Bank of England for both interest rate losses and the drop in value of gilts bought during QE. These payments ultimately benefit commercial banks, and other financial institutions, which hold hundreds of billions of pounds of QE-related reserves at the Bank of England.
The UK is an international outlier in having its Treasury pay for its central banks losses. To rectify this, IPPR recommends that:
- The Treasury introduces a QE reserves income levy on commercial banks, in a similar vein to Thatcher’s 1981 deposit tax on banks, to save £7-8 billion a year over this parliament
- The Bank of England slows down quantitative tightening (QT), by ending the Bank of England’s fire sale of government bonds to save more than £12bn a year
IPPR says these two policies could save the taxpayer over £100 billion over the course of this parliament giving the government much needed fiscal headroom and allowing them to support households.
Carsten Jung, associate director for economic policy at IPPR, said:
“The Bank of England and Treasury bungled the implementation of quantitative easing. What started as a programme to boost the economy is now a massive drain on taxpayer money. Public money is flowing straight into commercial banks’ coffers because of a flawed policy design. While families struggle with rising costs, the government is effectively writing multi-billion-pound cheques to bank shareholders.
“This is not how QE was meant to work – and no other major economy does it this way. A targeted levy, inspired by Margaret Thatcher’s own approach in the 1980s, would recoup some these windfalls and put the money to far better use – helping people and the economy, not just bank balance sheets.”
