The Labour party has in mind new institutions that will capitalise future-facing industries, create good jobs and see Britain catch up with its peers. That is one message from Rachel Reeves’s speech. Her Labour colleague John Eatwell suggests she is inspired by Alexander Gerschenkron, whose seminal work concludes that the way the state was organised influences its ability to adopt income-enhancing technologies. Many of Labour’s proposals, such as Great British Energy, are welcome. But this column has been sceptical about whether they would meet the scale of the challenges Britain faces without substantial funding or effective mechanisms for socially directing investment.
The Bank of England’s role remains particularly unsettling in shrinking the fiscal space available to ministers. Both the opposition and the government hide behind the Bank’s independence. However, MPs on the Treasury select committee raised concerns about whether it was playing a productive economic role this year. They warned that the rapid sale of bonds the Bank purchased through quantitative easing (QE) potentially had “worrying implications for public spending”.
The parliamentarians have good reasons to be troubled. On the Bank’s balance sheet, it considers as assets the bonds bought under QE. On the liabilities side of its ledger are the reserve accounts of the commercial banks, which are flush with cash from selling those bonds. The Old Lady pays interest on the reserve accounts. As interest rates rise, the central bank’s outgoings to private banks increase and its returns from bonds decrease. The result is notional losses on the Bank’s accounts. The hole in the Bank’s finances gets bigger as it briskly sells large amounts of bonds for less than it paid for them.
Unlike in most other major economies, the Bank’s “losses” are indemnified by the Treasury. This is nonsensical as the central bank cannot go bust. Nevertheless, the economist Daniela Gabor thinks the bailout could cost the taxpayer £230bn by 2033. Meanwhile, private banks are raking in big profits, an unearned jackpot from high rates. Last year the big four high street lenders made £44bn in profits, four times the amount they made in 2020. The Guardian has argued for windfall taxes on banks to repair public services. Gordon Brown, alternatively, thinks banks should be paid less interest on their reserve deposits, as in Europe, to free up funds to fight poverty.
The Bank’s monetary policy committee will make headlines this week when it decides whether to cut the base rate. But the committee also has a say on quantitative tightening (QT), which sees the Bank selling more bonds to investors next year than the total sales of gilts to cover government borrowing. Ending the sell-off of bonds – or at least slowing it down as Harriett Baldwin, the Tory MP who chairs the Treasury select committee, has suggested – would be prudent.
The chancellor, Jeremy Hunt, gave MPs the brush off. Faster QT constrains a government’s spending power while shovelling state cash into private banks. Ms Reeves missed an opportunity to recast the policy. Perhaps she thought doing so would imply a radicalism that undercut the impression of stability she seeks to project. The same concerns saw Labour throttle green investment despite the climate emergency. Economic development is affected by the industries that a central bank promotes. Labour wants a “decade of national renewal”. That won’t happen if the Bank of England is allowed to advance the financial sector at the expense of all others.
