With some modifications, the numbers can be different. The Office for Budget Responsibility itself estimates the impact of a 1% change in all interest rates on total debt interest in 2028-29 at £18.7 billion.
Moreover, there is something that could offer the treasury greater rewards. Why do bank deposits at the bank earn any interest at all?
These interest payments only began in 2006. None other than Charles Goodhart, a former senior bank official and former member of the Monetary Policy Committee, suggested the possibility of suspending interest payments. Savings could potentially reach £40 billion per year. (Keep in mind that it will be correspondingly lower as the bank rate falls.)
There are three arguments against.
First, if there is no interest due, banks will try to get rid of their excess reserves by bidding up the interest rates offered on deposits, and doing everything they can to increase lending and purchase assets. Accordingly, the bank will lose control over monetary policy and there may be a significant increase in the money supply.
But in the old days there were so-called “special deposits”, which were deposits that banks had to keep in the bank but could not use. Effectively, they parked excess funds with banks.
Secondly, such a huge sum would deal a devastating blow to UK bank profits, which would be completely undesirable. But in this case, the policy can be reduced. It is possible that banks will continue to earn interest on some of their reserves and only lose their entitlement to interest on the surplus above this limit, as happened between 2006 and 2009.
Third, whatever the amount, “taxing” banks in this complementary way would be unfair and distorting. However, if banks do not pay this “tax”, someone else in the economy will have to pay other taxes of the same amount, and these also cause distortions. Moreover, it was not long before the government had to bail out the banks at great cost to the public exchequer. Time to recover?
I can see why a conservative consultant would reject such reasoning. It’s definitely not a best-first policy. But, of course, we don’t live in a best-first world. Could the Labor Chancellor have less scruples?
Roger Bootle is a Senior Independent Advisor at Capital Economics roger.bootle@capitaleconomics.com