Adam Posen, a former and still influential member of the Bank of England monetary policy committee has been arguing this week that the Bank's base rate might need to reach 4%. Others are arguing for even more.
I think their analysis is completely wrong. But let's for a moment consider one consequence of this. That is on the cost of what are called the central bank reserve accounts (CBRAs).
These are the bank accounts maintained by the commercial banks and some other financial institutions in the UK with the Bank of England that have two functions.
One use is to let banks pay each other - which they do through these accounts, meaning that we can in turn pay people who have money in other banks. This makes them essential to the operation of the banking system.
The other use is to assist the flow of money to and from the government. Over the last 13 years that flow has been very much from the government to the economy. Quantitative easing created almost £900 billion of new money. That money is transmitted to the banking system through these accounts. As a result, the balance on them is near enough that figure right now. The banks hold this money that the government created on deposit with the Bank of England. That is because all money is debt, and when the Bank of England created this money it created a liability owed to the commercial banks which they consider to be bank deposit accounts.
By convention, the Bank pays interest on these deposits. Until very recently this was paid at the base rate of 0.1%. The cost was less than £1 billion a year at that time: it was of no consequence.
If, however, the bank base rate increases to 4% or even 5% this cost will skyrocket. The cost might approach or even exceed £40 billion a year.
Let me put this in context. The government has announced today that it wants to cut 91,000 civil service jobs to say £3.5 billion at a rate of about £38,000 per job, including on costs. This is how disproportionate this interest cost is. It would quite literally suck the government of funds to provide welfare to banks to reward them for holding funds on deposit with the government when those funds were created by the government in the first instance and handed to those banks free of any charge for nothing being done in return. The idea that interest should be paid on this that will be used as an argument to prevent people working and the payment of benefits is hideous.
What can be done about this? The answer is easy. The rate paid in these accounts should be set independently of the bank base rate. I suggest 0.1% would still do just fine. And then the government will save up to £40 billion a year. There is literally no reason why it cannot do this. It would be entirely legal to do so, and we're all used to banks having different interest rates depending on circumstances.
Will this be announced as a way of constraining this cost? I doubt it. After all, why would a banker want to stop the flow of unearned funds to banks? So the Opposition should be shouting about this instead. Will they? Only when they break their own fixation with the Bank of England being the epicentre of virtue within the economy. Given that does not seem likely I fear that p[people will suffer as unearned money floods towards banks over the next few years.
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My comment is solely about this matter: “The government has announced today that it wants to cut 91,000 civil service jobs to say £3.5 billion at a rate of about £38,000 per job, including on costs.”.
The government announcement has been made to the public through the Daily Mail; which tells you how Government actually works; principally through populist propaganda in its key media PR agencies (sometimes referred to as ‘the Press’).
This policy is the antithesis of Government: a thoughtless exercise of cynical, opportunistic political spin by a Government sinking under the weight of its own inadequacy. It reduces the civil service by around 20% of staff, returns staff levels to an alleged golden age in 2016 (tellingly, before Brexit), presumably all 90,000+ having finished the job shredding EU forms or generating useless ‘red tape’; and thus at a strike supposedly save £3.5Bn, all done at no cost; a cheery invitation for us all to look no further than the headline, and count the money saved.
Let us, therefore look beyond the headline. Dave Penman (General Secretary, First Division Association – the top level civil service union) has been quick to respond effectively to the lack of thought supporting the policy. Penman asks the basic question not even addressed in the announcement: “Ultimately they can cut the civil service back to 2016 levels, but they need to decide what the civil service must then stop doing as a consequence….. Will the Passport Office be cut back? Or the Dept of Health and Social Care?” Or the Border force and HMRC.
Brexit by definition increases the burden of border and customs controls. Removing them now simply opens the borders to uncontrolled access, and to no checks on foreign goods and services that currently protect consumers from shoddy or even dangerous goods. I simply pick one issue from a vast pool of purposive civil service activity. Penman asks the fundamental question that doesn’t interest Johnson’s Conservative Government: “Unless they’ve got a serious plan, it’s either another headline-grabbing stunt or a reckless slash-and-burn to public services without a thought or care about the consequences”. Where is the serious plan? What are the consequences of the Government policy?
Red-tape is the staple of Conservative Government and the Daily Mail. It plays to an absurd, fictional stereotype that all Government public servants do, is to produce red-tape (useless paperwork). Let us look at how that actually works. I offer one word that defines the real meaning of the ‘red-tape’ canard of the Daily Mail and other Government tabloids: Grenfell.
Grenfell flowed from a failure of Government regulation. This happens in two ways that Conservative Governments endlessly exploit, with the required help of their tabloid serfs; first, the existence and nature of the regulations (in the Grenfell case, building regulations). Second, and critically here, the monitoring and application of the regulations by the public services, and ultimately by the supervision of the regulations by Government. Conservative Governments typically attempt to avoid statutory legislation of regulations wherever possible (self-regulation is usually the preferred option but has gone spectacularly wrong in recent years, for example in the financial sector); but far more important to the Government bonfire of the red-tape is much less direct, but more effective and usually easier avoid public scrutiny; they legislate, but then simply do no provide the civil service resources to implement the regulations, ensuring the regulations fail, evasion is rife, the public harm goes unchecked, and the taxes are simply not collected.
There you have Neoliberal Conservative Government in a nutshell.
Thanks
Rees-Mogg was on R4Today this am, at his most pompous disingenuous worst. Trying to argue that as Brexit and Covid are ‘behind us’ somehow all these extra civil servants are no longer needed. Conveniently ignoring previously published data on the number of extra staff needed permanently to handle the extra Burden of Brexit (trade, customs, regulatory bodies etc) and the legacies of Covid.
He dismissed the evidence from UK In a Changing Europe (Anand Menon and co at Kings College – worth following) that Brexit had specifically increased the cost of food saying that he had never heard of them. Anand promptly Tweeted a photo of Greased Smug speaking at one of their events!
I could also add that across the board staff cuts of the kind being announced are a mark of the worst kind of management. Only to be expected.
He had a car crash and I am sure went back to the office thinking that the day had started well
I will claim a little credit for having e-mailed Richard about the interest on the Reserve Accounts yesterday.
I presume the £3.5 billion ‘savings’ by sacking the civil servants is a gross figure? Thus takes no account of the loss of PAYE, NI, Employers NI, VAT etc that these 91,000 (and their families) would be paying out of the wages. No doubt also takes no account of any costs of benefits that they might claim. Also no account of any multiplier in their local communities as these wages are not spent and thus do not provide income for local shops and business. So lets deduct 50% and say the actual net savings would be more like £1.75 billion. That then has to be set against the loss of the services that these civil servants would have provided. All reminds me of the £2 billion contract for the Thameslink trains being awarded to Siemens in Germany rather than Bombardier in Derby because it was £30m ‘cheaper’. Thus significantly contributing to the German budget surplus as £1 billion or so of extra tax revenues flowed to Berlin. ‘Cheaper’, of course, though.
I think on the Reserve Accounts, I am also correct the BoE gives the interest payments it receives on the £890 billion of gilts owned by the Asset Purchase Facility back to the Treasury. However the BoE deducts the interest paid on the Reserve Accounts from what it re-imburses. Of no consequence at 0.1%, but at anything much over 2% this will see the Treasury having to pay the BoE for their ‘losses’. In reality not significant as the BoE and Treasury are the same Group, but politically Sunak will be shouting from the rooftops!
At 4% Natwest Group would be getting a gift of around £4 billion a year, which would more or less double their declared profits. Treble bonuses all round, anyone, for their ‘superior skills and intelligence’ in running the company so well?
I apologise Tim
I should have given credit where due
In light of Tim’s comment, and specifically his first main paragraph, I’ve been wondering Richard is there is such a thing as a “budget spillover” analysis already out there, by which I mean an equivalent to the tax spillover analysis you describe in one of your other blogs today, but focused on budget cuts or increases. I would have thought this might exist already under a different name, but if it doesn’t then I think it would be a good idea to create this concept and use it to highlight the detrimental effect that austerity has on our economy, as Tim’s rough analysis does in the comment.
By that same token, I think having a “budget spillover” analysis for, say, funding the Green New Deal, a Job Guarantee, funding insulation upgrades for all homes etc. would also be very useful. I can see this analysis being particularly useful to justify any additional spending that can only be funded by printing/creating new money, as you can then point out whether the extra tax collected from new job creation and/or the multiplier effect on the economy, as well as second order effects on other budgets (e.g. paying the living wage improving people’s health, thereby reducing backlog on NHS, etc.) will be sufficient enough to counter any supposed inflation caused by “printing money”. Who knows, perhaps those benefits will be so large that not only do they pay for themselves (thereby cancelling the extra money created), they also generate additional revenue that pays down the national debt, or makes spending in other areas easier…
I rather like that idea
I will muse on it
The £2 billion contract for the Thameslink trains being awarded to Siemens in Germany rather than Bombardier in Derby because it was £30m ‘cheaper’. This was because of the cost of finance in Germany was less that in the UK.
Spot on.
No doubt the slashing of the civil service will be followed by the awarding of a number of lucrative service provision contracts. The usual rent collectors will gather, the farmed out work will not be monitored properly and costs will increase and surpass the ‘savings’ on 91000 redundancies.
A very well made point. We are moving towards a type of neo-tax farming solution, applied to public services, where private sector rentiers are selected (through processes nobody understands and are veiled by contractual secrecy), and paid public funds to fulfil public services (badly, and without adequate supervision); and without paying the fee the tax farmers at least paid the French Crown in the seventeenth/eighteenth centuries for the privilege. The privilege of elite access to public resources now seems to come without any strings at all.
You beat me to it John. I just noted that in a previous response and a tweet half an hour ago
It’s the ‘Rentier State’ folks – here to make money out of us – Neo-lib nirvana has arrived.
The mood in my part of the public sector is not what I expected today.
I hear a lot of my colleagues casting their minds back to how important we were during Covid and now it looks as though we are surplus to requirements again. I know that I was at work during Covid and ended up helping out on bin collections as did colleagues in my housing department I work in. The Daily Mail policy is not going down well. There might be a backlash after all. Fingers crossed.
Announcing it this way was dire
Cutting the civil service by 20% and sacking or making redundant 97,000 civil servants with a “saving” £3.5billion, is a completely false assumption by the government and Dail Mail. According to Rees-Mogg a new”efficiency” will be produced by using extra new technology (unspecified) to replace displaced labour. This really is a dream as the previous introduction of IT systems in the civil service have been fraught with difficulties, delays, and massive cost overruns. Also, the redundancy payments for the higher-paid senior civil servants will be enormous for those with long service. Plus UC or JSA payments for thousands of other staff who won’t automatically go into other jobs in a smooth transition. Whatever savings that may be made (unlikely) will probably be mopped up straight away on sending more troops to Estonia and Finland and weaponry to Ukraine.
I really like your idea of a separate interest rate – in-keeping with the late Richard Douthwaite in his book The Ecology of Money which wisely raised this possibility. It’s something I have believed in for some time myself. Interests rates as they are are too blunt a tool and this offers the possibility of some refinement.
I have not read his work for a long time – but liked it when I did, and it’s still on my shelf
The more the national debt / deficit increases, the more our Tory government can uses the premise of ‘We’re bankrupt….difficult decisions need to be made’, before making 1000’s more unemployed.
They can manipulate these figures…they have ultimate control of the currency, can create / destroy to their hearts content. So. They have 2 choices.
1. Do the right thing, limit the amount of money going to the banks due to interest rate rises.
2. Give as much money to the banks as possible, because every penny is an additional reason to say they can’t fund the NHS. Etc.
The national debt has always been a propaganda tool to justify cuts. This is no difference.
“provide welfare to banks to reward them for holding funds on deposit with the government when those funds were created by the government in the first instance and handed to tose banks free of any charge for nothing being done in return.”
In some respects a variation on the CUM-EX scandal where banks were using loopholes in the timing and ownership of shares to claim tax back that was not due to them. In this case, claiming the government owes them money for holding government money.
In the case of the civil servants, perhaps I’m missing something, but my understanding from this blog is that the tax-mob is barely able to collect taxes & indeed, fails miserably to close down tax scams. Will this reduction in people also cover HMRC? If so, it would seem that the current imbecilic gov wants to make things even worse.
Silence from Liebore (no surprise – perhaps Keef is having a beer?)
I foresee HMRC being outsourced. What could go wrong?
The missing link between all these things are the politics of data governance and of the infrastructures through which it flows – who owns it, how, when, and between whom it is shared, who is able to access it and the products that flow from it, at what price (financial and political) and how these inform Govt policy. Control of data governance was a core aim of Brexit and it amazes me that it informs so little of the discussion. There should be a national dialogue about this – it underpins everything – but like an iceberg, it barely breaks the surface.
Excellent point
I’m sorry, but I just don’t get it. I know this make me sound stupid, but maybe it’s time to accept the reality that rather than being an intellectual powerhouse I am a bear of very little brain.
The money that was created by QE was spent on Covid (furlough, dodgy PPE etc) and as you’ve said many times government debt did not increase during the pandemic because all the extra spending was financed by QE. So how can the money both have been spent out in the economy and also be languishing in the reserve account.
“That is because all money is debt, and when the Bank of England created this money it created a liability owed to the commercial banks which they consider to be bank deposit accounts.” I must have read this sentence 50 times and still can’t grasp it. Money is debt – yes. A bedrock of MMT is that the government creates money as it spends creating a debt that society repays in the form of tax – have I got that right? When I borrow £10 from a high street bank, that bank creates the money, gives it to me and then I owe the bank £10. In both cases (the government spending and the high street bank lending) the body creating the loan is then owed the money back, but you seem to be saying that when the BoE creates £10 that the BoE then owes the £10 to the commercial bank – it just boggles my mind.
Just to be clear, I’m not saying you’re wrong – I’ve read enough of your work to believe you, it just … I don’t get it.
I knew someone would ask.
This is easier to think about if you consider banknotes, but the principle is identical.
Bank notes are spent into circulation. They are not randomly scattered. So the double entry to create a note is debit government expenditure account for what ever is bought and credit the bank note liability account. Remember – that promise to pay is printed on the note. And the liability exists as long as the note is in circulation. What cancels that liability is the return of that note to the central bank – done when tax is paid, or it is deposited with the government in a savings account (when it is then commonly called debt, but which is just a deposit) or when a physical replacement is requested, although that just perpetuated the debt.
This concept that the debt exists until repaid by tax or substituted as a deposit is vital. And it is exactly the same with the electronic money the government exists. The debit is for the expense. The credit remains with the commercial bank to whom the government paid the money as an intermediary to make payment. And it says there until tax cancels it or the money is deposited as another form of saving. So the commercial banks get a bank deposit account created by government spending on which it is now suggested vast sums of interest should be paid.
Does that now make sense?
So, this is the continuous cycle that is money – because if the notes were not cancelled, that is where the inflationary risk is – an endless cycle of money creation and destruction (destruction through savings and tax – where it is taken out of circulation). The constant emptying and filling of the bucket that is the economy with money.
?
This reifies to me the destructive potential of austerity BTW, where the headwaters of the money supply are essentially cut.
In essence, yes
Richard, I’m really trying and I can feel that you’re really trying as well which I greatly appreciate, but no, I still don’t get it.
I think you’ve probably expended enough energy trying to enlighten the unenlightenable, but I’ll try to explain where I stuck.
In general I don’t find the “promise to pay on a bank note” a very useful explanation (a promise to pay what to whom), but I can see from a double entry point of view that you could have, in my imagination, a spreadsheet with columns named “money I have to spend” and “bank notes that I have created” and that both would increase when a bank note is created and I can see that the “bank notes that I have created” column could be seen as a liability and that it would only decrease when taxes or savings remove the bank notes from circulation. But that “bank notes that I have created” column feels like a piece of internal account keeping rather than an actual debt that you would have to pay interest on.
Similarly with the electronic money and the commercial banks I could imagine a pair of spreadsheet columns “money in the government current acount at HSBC” and “money that I have moved to commercial banks” both increasing when the BoE transfers newly created money in order that it can be spent. But again the “money that I have moved to commercial banks” column feels like internal bookkeeping and not something that you’d have to actually pay interest on to third parties. If anything in this transaction it would feel like that debt should be from the commercial banks to the government, but I know that is not the case – in that sense the debt is from the economy in general to the government.
The other thing that nags at my understanding is that this seems only apply to newly created money. I thought (presumably from having read it here!) that the BoE went through a whole song and dance with newly created money – they create new government debt which they sell to the market and use the proceeds from that sale to fund government expenditure, then they use the newly created money to buy back old debt. So from that point of view the money to spend from QE will look a lot like money from issuing new debt – so would both of those ways of increasing money for government expenditure create a liability with commercial banks when they are spent into the economy?
Peter
Before I go further have you read Money for nothing and my Tweets for free? There is a free download available or you can buy a hard copy on Amazon
I think that would help
Richard
The notes/coins at least remained in circulation. The digital era has tied money to a specific transaction. This harms the poorest first.
It has been downloaded waiting to be read for a while now – I shall move it to the top of the list though and see how I get on. Thanks … Peter
Thanks
As an HMRC employee, this is what our Departmental Head put out today:
“Colleagues
You may have seen media reports this morning about the government’s decision to reduce the size of the Civil Service over the next 3 years. I am sorry that you have learned this from the media rather than from me or Civil Service leaders.
The Cabinet Secretary and Head of the Civil Service, Simon Case, wrote to all Permanent Secretaries yesterday saying that the Prime Minister has asked for a plan to return Civil Service workforce numbers to 2016 levels over the next 3 years. This means reducing the current workforce by around 91,000 over that timeframe, from across all departments and arm’s length bodies.
The Civil Service must consider how we can streamline our workforce and equip ourselves with the skills to be an even more effective, lean and innovative service that continues to deliver for the people we serve.
No decisions have been taken yet on how we will do this or how it will impact HMRC’s people or the work we do. The Chancellor, Rishi Sunak, the Chancellor of the Duchy of Lancaster, Stephen Barclay, the Minister for Government Efficiency, Jacob Rees-Mogg, and the Cabinet Secretary will now consider how the reductions are to be implemented across government. In line with their steers, we will work to produce our plans over the next month.
Since 2016, the nature of our work in HMRC has changed: we have made cost efficiencies but at the same time we have grown in some areas to respond to EU exit, the COVID pandemic, and Budget measures, and that has led to us being relatively stable in size.
It is only a few weeks since we received our departmental budgets for the next 3 years, based on last November’s Spending Review settlement. However, since then the outlook for the UK economy has changed and we must now consider how we can streamline our services and work with our ministers to review their priorities.
We will continue to keep you updated when we have more information to share. Thank you, as ever, for your hard work and professionalism.”
Make what you will of that.
In a department stretched beyond limits that cannot do what is required by Brexit it is utter madness and disastrous Labour relations
This ‘policy’ shows you what sort of imbeciles are running our country doesn’t it?
Most of them seem to be the lesser offspring of more talented people who made money in the Thatcher era and were last in queue when the brain cells were given out.
If it is only one thing, this ‘government’ is an advert for the need to restore social mobility and enhance the gene pool.
Again, what a bunch imbeciles.
As the Institute for Government noted “Between 2010 and 2016, the size of the civil service fell by 19%, but numbers have risen in every quarter since the EU referendum in 2016. In the last year, the overall number of civil servants increased by 34,190 (7.8%) when excluding temporary Census Field staff.”
In other words, civil service numbers shrank due to tory austerity, then gre w due to the tory Brexit, plus the pandemic.
Now the joke PM, oblivious to the fact that his wretched Brexit most certainly isn’t over, wants to reduce staff numbers back to pre Brexit levels. Well, from my PoV in HMRC, I’ll note the following:
When I joined HMRC in 2003 there were over 100,000 in the department. Now it’s about 66,000. I’m only still working as a civil servant at all because, and perhaps the imbecile Mogg would like to take note, I was offered the option to WFH full Time in late 2020, rather than take the redundancy HMRC had to offer by law as a result of the office closure program making my commute into london over an hour in duration.
In the midst of a pandemic with a partner classified as in the extremely vulnerable category, no way was I going to continue working for HMRC unless I was offered this. It was offered very quickly, because, I suspect, HMRC finally realised they didn’t have the staff to deal with Brexit, C-19 and it’s normal work. We’ve also been recruiting a lot to try and get more staff in to replace all the experienced people who’ve left as a result of the office closure plan.
So how does this govenment now suddenly expect HMRC to cope with all the work it has because of the above-mentioned factors? It is a joke, like the anti WFH nonsense they’ve come up with.
Agreed
I share the anger about the civil service reductions.
However, I am not sure I agree with you about interest paid on reserves.
First, let’s be clear, the idea that 4% rates are needed is nonsense…. but suppose it were the sensible policy rate. If reserves were not renimerated at a level close to 4% then banks would lend into the economy below 4% and undermine the 4% policy rate.
Also, reserves held by banks have corresponding liabilities in the form of customer deposits. It’s not the level of rates but the spread between rates they receive on reserves and pay to depositors that determines the size of profits.
So, the reason to reject 4% rates is that they are wrong for the economy…. nothing to do with bank profits.
Clive
Apologies for delay – blame the family!
This would work if banks showed any sign of passing on the interest rises so far, but they don’t and I doubt they will, especially since there is no lending or other deposit linked to the CBRAs
We agree 4% is not needed, but I see what might be paid as windfall – and quite independent of other aspects of base rate implementation
Let’s pray the rate is never seen
No apology needed.
I agree, in practice higher rates allows banks to expand margins and is a windfall. … but if rates go to 4% anytime soon I will eat my hat.
To be honest, so will I
I would even doubt 2% right now
Essence?
Note that I’m always happy to be put right if I’ve not got the whole picture Richard – happy to be mentored if you have the time.
‘The notes/coins at least remained in circulation. The digital era has tied money to a specific transaction. This harms the poorest first.’
Thank you John – now that is a fascinating insight.
The circulation of money (notes and coin) freely is critical. For the poorest this free circulation is not just vital, but is the main expression of freedom as a real benefit they have. The digital era is robbing them of their real opportunities for freedom. I believe this is absolutely fundamental – far, far more important than any ideology can offer them
I think you are on to something here John
The history of the improvement in general living standards and the economic activity of the poor is the history of the expansion of money in circulation as notes and coin (small denomination). The digitisation of money turns a ‘free’ accessible good into a narrow form of closely monitored credit; to which the poor may have limited, or no access at all.