People say Rachel Reeves has a £40 billion black hole in her October budget. But that number is wrong — or at least, it's wildly inflated. In this video, I show how £15 billion could be saved instantly — without cuts or tax rises — simply by stopping unnecessary interest payments to commercial banks on money they never earned. The Bank of England pays £25bn a year in interest on reserves to these banks — and £15bn of that is completely avoidable. The ECB and Bank of Japan don't do this. So why is Reeves letting it happen?
This is the first in a short series on real options to fund public services and challenge austerity.
This is the transcript:
People are saying that Rachel Reeves has a £40 billion black hole that she's got to fill in October, or the economy is going to be in trouble.
The media are saying this. Even Gary Stevenson is saying this. But this isn't true.
This is the first in a short series of short videos on what could be done to fill this supposed black hole, the existence of which I even doubt .
But let's start with the most obvious thing that nobody else seems to be talking about, and that is that the Bank of England is paying interest it does not need to.
The Bank of England currently owns £600 billion worth of UK government bonds, and that sum is matched with £600 billion worth of money that it placed into the accounts of UK banks during the course of the 2008 and 2020 economic crises, the new money created by quantitative easing.
That was not money deposited by the banks themselves. They did nothing to create it. But despite that, they are being paid interest at 4.25% on that money at present, at a cost of over £25 billion a year to the government at this point in time.
This is a state gift to commercial banks from public funds, as if they needed it.
Actually, they don't need it, and nor does the Bank of England need to pay it.
The Bank of England, I agree, need to pay interest on around £200 billion of that money. That is sufficient for it to influence the interest rates in the rest of the economy.
Remember that in 2008, it only paid interest on £20 billion of reserves to achieve that goal, so £200 billion now is more than enough to achieve that objective.
But that means that there is no need to pay interest on £400 billion of the money that is held by the commercial banks with the Bank of England.
If they weren't paid interest on that money, which they've never earned, then Rachel Reeves could save £15 billion a year, instantly, and as a result, Rachel Reeves would no longer have a black hole of £40 billion, even if that estimate was true. She would only have a black hole of £25 billion.
I'll explain how to fill that in other videos, but the point is, I've already shrunk the black hole, and I'm proud of doing that, and I think it should be done by the government as well because this is money that's being wasted, and I don't like governments wasting money.
Nobody can say that this can't be done, because the European Central Bank does this, and the Bank of Japan does this. They do not pay interest on all their reserves. So there's no technical reason why this couldn't be done. It's just that Rachel Reeves is deciding to pay out £15 billion to the bankers to fund their wonderful and excessive bonuses when she could be using that money for social benefit.
Which would you do?
Keep the money, and make sure she didn't have to do austerity? Or give it to the bankers? What's your decision?
Poll
What do you think Rachel Reeves should pay as interest to commercial banks?
- 4.25% on £200 billlion, saving £15 billion (50%, 231 Votes)
- Nothing (44%, 201 Votes)
- 4.25% on everything - costing £25 billion (3%, 13 Votes)
- I don't know (3%, 13 Votes)
Total Voters: 458
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“simply by stopping unnecessary interest payments to commercial banks on money they never earned.”
I find this statement grotesque, unfair and I will be referring this website to the relevant authorities.. probably the Met Police.
Bankers work hard for their money, & you can imagine the mental stress at having to wine & dine imbeciles in what passes for the current UK government just to keep the status quo ante. It is very hard to get them to understand that the banks keep the country afloat, and we spent a vast amount of time and effort training Mrs Reeves to understand this, good god man, have you seen her expensese when she “worked” for…..I forget who drew the short straw. Anyway, the Uk has a thriving luxury goods industry and threatening hard working bankers and their hard earned interest in turn threatens this industry and the UK serfs that work for it.
🙂
Ho, ho, ho …. However, Sir, I must quibble ….
You say: ” It is very hard to get them to understand that the banks keep the country afloat.” — I reckon that Rachel and Keir don’t even need to be convinced of that — it is thoroughly entrenched in their neoliberal hearts ! – like a cheap stick of rock.
No come on, this is a form of public wealth holdings and a form of collateral for banks, maintaining their worthiness. The only aspect I object to is that consumers cannot obtain these rates from these banks in their savings.
You are trolling
4.25% is widely available Benedict
If you don’t shut up Mike Parr it will soon be an offence under this Starmer government to even talk about MMT! 😉
The saving seems to be £17 billion not £15 billion (i.e. £400 billion at 4.25 percent = £17 billion).
But, as Richard has pointed out previously, that is the gross annual saving. The net saving to the Treasury would be £17 billion less bank corporation tax at 25 percent on the £17 billion no longer received (i.e. £17 billion less £4.25 billion = £12,75 billion).
But taking this action would have the effect of increasing the demand for government bonds and that would increase their price and reduce the interest rate on bonds, so there would be further government saving.
So, this policy would be part of an overall strategy of maintaining low real interest rates at little above the target rate of inflation of 2 percent.
The base figures are subject to change – so I used an approximation, appropriately. Spurious accuracy is an inflation of poor economic thinking.
And this need not have a corporation tax cost. As I pointd out, the sums might be spent. We cannot be sure what the economic multipliers are.
See the post on quantum economics coming tomorrow.
You have been saying this time and time again – and so have commenters here.
If ECB and B of Japan don’t pay this interest why don’t the highly paid BBC economics correspondents ever raise it with government spokespersons?
On another tack – one doesn’t want to believe in conspiracies, but is BBC featuring NIESR only now its been recently taken over by arch-neoliberals?
How about zeroing debt? Most of which is nonsense?
What does zeroing debt mean?
Sadly more consumption!
I have no idea what you are talking about.
If you want toi be posted here please make an effort to make sense.
Apologies Richard. An explanation.
So the world’s largest economies are teetering on bankruptcy (obvs not as they are fiat). However they keep borrowing and money itself, eventually devalues.
Money itself is a social construct and at what point does it become obsolete? This i question from an environmental aspect as I’m well aware of it’s negative impact.
With regard to Reeves then any investment should be in the Green economy imo. At this point she could raise taxes for such investment and reduce borrowing costs through sound investment.
We are at crossroads with regards to the world economy and we can no longer defer obligations to both the well being of people and the environment.
Personally I believe that at some point we will need to zero debt, as the ratio to GDP is already incompatible with the borrowing and investment that we need.
She does not need to raise tax to invest. Tax does not pay for investment. You have simply got that wrong.
And zeroing debt means eliminating a large part of ordinary people’s pensions. Are you happy about that?
I thought you made no sense. You don’t.
The world’s largest economies are based on fiat currency. (now makes sense)
They keep borrowing (yes… and…???) and money itself, eventually devalues. (how?)
Money itself is a social construct (yes)
At what point does it become obsolete? (why become obsolete?)
With regard to Reeves then any investment should be in the Green economy imo. At this point she could:
raise taxes for such investment (taxes don’t pay for investments)
and reduce borrowing costs through sound investment (eh?
Personally I believe that at some point we will need to zero debt (which would mean……..no money – every pound note is gov debt, no gov debt means no money).
Words in parentheses mine.
(Mr Houlden – you sound terribly confused. Suggestion: read a couple of books on how govs are funded and the role of tax. Oh & if you were a country, ask yourself how you could owe yourself money, working on the basis of a fiat currency.)
Your conclusion is correct.
Richard, we have been through a number of resets and the last being Bretton Woods. I’m not asking for you to agree with me and I would ask you not to be so dismissive.
Debt alleviation to the poorest countries and investment in those countries could change the world itself. Holding such countries at 200-300% of GDP in debt ratio maintains poverty..
Some form of reset will come and I agree with much of your analysis. But things are achanging. Hopefully for the good.
Usually I have not a clue what you are writing about.
I do this time, and agree with you.
For some reason, perhaps known only to myself, I think of Reeves and Starmer and many others of their ilk as characters in a really awful Dickens tale. They are all grubby, opportunistic, mostly inadequate, filled with deceit and thinking only of themselves. It seems none of them have any real gumption or courage to change things for the better, all they are thinking about is their comfy gold plated retirements. I envy none of them, as they have all sold out.
It’s certain to say that none of them are public servants. What a sad state of affairs, a cowardly and spineless bunch if ever there was. Playing games whilst millions live uncertain lives.
Well said, for pointing out the truth.
But will anyone else – I doubt it.
I’ve read today in our wondeful media that it is £41 billion and £51 billion.
They can’t even make up their mind on what figure to try and scare us with.
But wait……I have heard Farage say that this would be a good idea! Tell Starmer and straight away he will be wanting to copy him. We don’t care anymore why this Labour gov does what it does, so long as they end up doing the right thing. It’s taking them too long to reason things out using logic, so if they are nudged in the right direction(for once) by that Reform rascal, that’ll do for me.
I’m going to expose more of my economic illiteracy here – perhaps I don’t understand what bonds are – doesn’t the govt issue bonds to borrow money from commercial lenders? If so it would be paying a fee to borrow that money. So if the BoE holds govt bonds has the govt borrowed from the BoE? Where has the BoE got the money it lends to govt?
And why do you say [quote] The Bank of England currently owns £600 billion worth of UK government bonds, and that sum is matched with £600 billion worth of money that it placed into the accounts of UK banks during the course of the 2008 and 2020 economic crises, the new money created by quantitative easing. [/quote]?
This all looks suspiciously like what is politely called creative accounting, but, as I keep repeating, I know nowt about economics.
I am going to do a series on bonds. Can this wait for that? You are very confused, and I can only suggest that will be the best way to address these issues.
I must admit that this is so bizarre that I am struggling to understand. Sorry if I’m being a timewaster.
The bank bought these bonds, presumably from the banks, for quantitative easing. That gave the banks money to inject into the economy via commercial loans?
I know it doesn’t have to be “real money”, thanks to yourself.
But these bonds have a yield of interest, so is that payable from treasury to the BOE?
The banks had this money and presumably did ease it out, so is it now replaced by a credit balance for loans to whoever. So they are receiving interest on these from other parties?
So the objection is why on earth does the government have to pay interest? Is it because the banks aren’t deemed to have made enough? Or just to balance the books?
Sorry, my brain hurts!
Try this https://www.taxresearch.org.uk/Blog/2020/10/26/mythbuster-what-is-quantitative-easing-and-how-does-it-work/
Thanks Richard.
I think I more or less understand now. I don’t suppose Rachel Reeves does.
“2008, it only paid interest on £20 billion of reserves to achieve that goal, so £200 billion now is more than enough”.
If it was really £29 billion in 2008 (just 17 years ago), it seems to me that paying interest on £200 would be more than more than enough. Why so much more?
Because they won’t concede less. I am being pragmatic.
I’m sure I said £200 bn seems ‘more than more than’ enough, but one of the ‘more than’s seems to have got lost in transmission ….
This is what my MP said in response to a previous post (back in April I think) that you prompted an MP letter from:
“Thank you for reaching out with your concerns regarding the interest payments on Central Bank Reserve Accounts. I appreciate your engagement on this important issue.
The Bank of England’s payments of interest on reserve accounts is indeed a complex issue. The context is shaped by the bank’s monetary policy operations and is a standard practice aimed at managing liquidity and interest rates within the financial system. While it is true that different central banks across the world employ various tactics in managing their economies, the strategies are often tailored to their specific economic contexts and challenges.
The Bank of England uses these mechanisms as part of its monetary policy to control inflation and ensure financial stability. When commercial banks hold reserves at the Bank of England, it is part of a broader strategy to maintain trust and stability in the banking system. The interest paid on these reserves is a means to encourage financial institutions to park their funds with the central bank, ensuring sufficient liquidity in the market and aiding in managing overnight interest rates.
As I am aware, last year, newer political parties claimed that if the Bank of England should stop paying interest to commercial banks, this would save up to £35 billion per year. As I understand, this has been refuted by both the New Economic Foundation and the Institute for Fiscal Studies.
Last year, the Bank of England paid 5.25% interest on these deposits- which was the same as the official base interest rate. At the time, the Bank held around £697.6 billion in these reserves. Most likely, newer political parties had come to the ‘£35 billion’ figure by taking 5.25% of around £700 billion.
As such, after these claims from other parties, the IFS explained this policy would raise much less than £35 billion per year. Likewise, an analysis on this issue from Tax Policy Associates outlined that these revenue projections appear to be over-stated by at least £15 billion and possibly as much as £30 billion. Similarly, the decision to curtail all interest on these reserves could likely result in a series of complex macroeconomic consequences.”
Seems like a lot of typical distraction techniques in there. This was what I had written:
“I am aware that the Bank of England pays interest at a cost to the UK government of more than £20 billion a year on the Central Bank Reserve Accounts maintained by our commercial banks with it, and that this is unnecessary because such payments are not paid by the European Central Bank in a similar situation, or by the Bank of Japan. Why then do you want these payments to continue when the money could instead be used to support those who have disabilities or those who are living in poverty?
I very much feel that the Labour party has forgotten its roots and who it is meant to represent.”
Thank you.
And re distraction, you are correct.
Omnibus woman’s view: I found this fairly easy to understand, maybe because I’ve been attending here for a while! The video on profits the other day I found needed a second viewing. You have some very knowledgeable followers, but also people like me, keen to learn but with no grounding in economics, little idea of banking, and so on. I hope this is useful.
Thanks
The BoE, HMT, OBR and Cabinet Office are all seriously influenced by the City.
The interest rate originally payable after GFC was tiny but has now grown considerably. Yet despite this no change in policy. How odd!
I do not expect Reeves, Bailey and Co to want to change the arrangements unless something else is found as a substitute and a long end date given so that commercial banks can adjust.
Dear Richard
Not sure you got my last attempt to communicate my response from Treasury on this subject. Here is the text again – if it’s of any interest to you. I can let you have the pdf as an attachment to a direct email to you if you wish.
MC2025/09408
HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ
Catherine West MP
House of Commons
London
SW1A 0AA
1 July 2025
Your ref: ZA21243
Dear Catherine,
Thank you for your email of 24 April to enclosing correspondence from your
constituent, Richard Boulton, of 161 Fortis Green Road, London, about the Bank of
England.
Inflation reduces real incomes, creates uncertainty, and threatens growth. Low and
stable inflation is an essential pre-requisite for economic growth and improving living
standards, which is why the independent Monetary Policy Committee at the Bank of
England is taking action to keep inflation at target sustainably in the medium-term.
The Bank of England has operational independence from the Government to carry out
its statutory responsibilities for monetary policy and financial stability. Monetary Policy
decisions, including quantitative easing (QE), are made by the independent Monetary
Policy Committee (MPC) at the Bank of England (‘the Bank’).
QE is a form of monetary policy, designed to boost the level of spending and
investment in the economy by purchasing assets to lower interest rates. Under this
policy, the Bank purchases assets, primarily UK government bonds known as gilts,
from the private sector, financing this from the creation of central bank reserves.
The Bank implements monetary policy by paying interest on reserves held at the Bank
by the banking sector. Paying interest on reserves is an important part of the
transmission of monetary policy to the real economy, which is crucial for achieving
price stability. By paying interest on reserves, it allows the Bank to control short-term
market interest rates in the expectation that these market rates transmit through to
borrowing and savings rates for firms and households, and subsequently impact the
real economy, and aim to keep inflation at the 2% target.
The Bank transferred £124bn in excess cash to HM Treasury between 2012 and
2022. Cashflows have now reversed, following the increase in interest rates and the
MPC decision to sell back its QE assets to the market. This process is called
quantitative tightening (QT).
Many central banks that undertook QE are now incurring losses, including the US
Federal Reserve and the European Central Bank. Different arrangements exist for
sharing QE-related profits and losses between central banks and national treasuries.
While this will impact how losses are recorded, ultimately, they will end up on the
books of national governments who are the central banks’ beneficial owners.
There are no plans to change the way reserves are remunerated at the Bank of
England. The government continues to support the Bank to bring inflation in line with
its target, including by managing the public finances responsibly.
I’m proud that the government is already tackling the drivers of people being out of
work and supporting people into good jobs. We’re investing an additional £26 billion in
the NHS to drive down waiting lists, making work pay with our landmark Employment
Rights Bill, and introducing the biggest reforms to employment support in a
generation, with our £240 million Get Britain Working Plan.
The Secretary of State for Work and Pensions has announced that we’re going even
further, investing £1 billion into employment support. This is one of the largest ever
investments in support to increase opportunities to work for sick and disabled people,
guaranteeing high quality, tailored support to get people on a Pathway to Work.
This will come alongside a package of reform to support people into jobs and make
the broken system fairer and more sustainable. I’d like to highlight a few of these
measures that I believe will make a significant difference to our country and people’s
life chances.
• First, we are addressing the perverse financial incentives that hold people back
from work under the current system by rebalancing the payments in Universal
Credit. This means that we are increasing the standard allowance above
inflation for the first time ever, with a £775 cash increase per year by 2029/30
for existing and new claimants, while reducing the health top up for new claims
from April 2026, alongside active support to help people back to health and
work.
• Alongside this, we will remove barriers by ensuring that going back to work in
and of itself will never lead to a reassessment. This ‘right to try’ will give people
the confidence to take on a job knowing that if it doesn’t work out, they won’t
have to start from scratch.
• In addition, we are consulting on a new unemployment insurance that will help
people quickly get back on track if they fall out of work, giving them a higher
rate of benefit.
It’s also important to point out the measures we have announced to protect those who
are most in need. We will protect existing Universal Credit claimants by holding their
health top-up steady in cash terms while they benefit from the higher standard
allowance.
Please pass on my thanks to Richard Boulton for taking the trouble to make me aware
of these concerns.
Yours sincerely,
EMMA REYNOLDS MP
ECONOMIC SECRETARY TO THE TREASURY
[…] could, of course, avoid that by eliminating payment on much of the central bank reserve accounts, as I explained recently). This will fuel the austerity […]