At the Labour Party conference this morning, Rachel Reeves said:
“There is nothing progressive, nothing Labour, about government using one in every £10 of public money it spends on financing debt interest.”
She used this claim to justify “tough choices” and the suggestion that there is no money left. That argument is both misleading and totally unnecessary.
The reality is that of the supposed £110 billion debt interest bill for 2025–26, much is not as Reeves wants people to believe it is. In particular, the cost of interest to the government is not fixed, as it is for individuals. It is, in large part, a political choice, and Reeves has tools she could use to cut it.
Here are five things she could do:
- Recognise that the government owns at least 23% of its own debt. Latest data show that 23% of the government's debt is owned by the Bank of England, meaning that approximately one quarter of the payment to which Reeves referred is not a cost to the government at all. Some honesty on this issue would go a long way to enhancing her economic credibility.
-
Acknowledge the truth about recycling. Reeves should acknowledge that a significant part of the interest the government pays comes back to it over time as tax receipts. The proportion is a little hard to estimate, and there may be delays, but when large parts of the interest paid eventually funds pensions or bank and corporate profits, this must be the case, with consequent multiplier effects following on. Quoting the gross figure without adjustment is a distortion.
-
Stopping quantitative tightening (QT) is an option. The Bank of England is deliberately selling bonds into the market at a loss, with the aim of forcing up bond yields and so interest rates, in the process, inflating the cost of servicing government debt. Reeves could instruct that QT end tomorrow, and the cost would fall.
-
Tell the Bank of England to cut base rates. Interest rates are still being held at unnecessarily high levels, long after inflation, driven mainly by external shocks, has eased. Those high rates are now simply a subsidy to the wealthy and are themselves inflationary. Reeves could insist that the Bank align monetary policy with fiscal responsibility.
-
Cut the interest on central bank reserve accounts (CBRAs). The Bank of England pays commercial banks base rate interest on the reserves created during QE, handing them billions of pounds in free income. This is corporate welfare, not sound economics. Reeves could change the rules and end it.
The conclusion is simple. When Reeves says there is “nothing progressive” about spending on debt interest, she implies she has no choice but to accept the bill as it stands. That is wrong.
She does have a choice. She could cut the bill by tens of billions without harming public services, without raising taxes on ordinary people, and without resorting to austerity.
If she refuses to use the tools available, it is not because there is no alternative. It is because she has chosen to prioritise the interests of the City of London and the banks over those of the NHS, schools, and care.
That is not progress. That is not what Labour should be about. And it is not good economics. But Revees is choosing it. Why is that?
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Because she is in hoc to the City; for that is where she sees her future employment and prosperity.
The answers to that last question have been written on your blog many times before. Reeves is choosing to increase revenues in the financial sector, I guess believing it will benefit us all in the long term, but we know that is not the case. An important question is how can your 5 points gain traction with the public and, in particular, the media so that the right questions are asked of government?
Let me work on this.
Sometimes the reason ‘why’ is not a calculated policy decision or external pressure but emotional trait. Sticking rigidly to the rigid rules makes a person feel they are virtuous and even superior to those who do not. It happens to some politicians, generals, economists and even in psychotherapy I saw the same thing. Holding the therapeutic frame in all circumstances. While it is important, there are times it helps the client to move outside it. When I did -with care- it turned out to be the right move.
The deeper reasons-pleasing the internal parent, a defence against criticism or unwlllingness to change their mind are all possible but without knowing the person, speculation.
Norman Dixon wrote The Psychology of Military Incompetence’ and ‘Our own Worse enemy” some decades ago but much of what he said still holds true in my humble opinion.
What you say makes a lot of sense to me.
But if we are psychologising (well, I am, maybe not you) then I put it down to nothing more than simple class hatred at root. Which is what drives all “austere” policies. To whatever extent government action indulges the hoi polloi, it must be undercut. In this the difference between Labour and the Conservatives is a matter of degree.
I don’t know if Rachel Reeves is really part of the elite. If not, then there is a certain amount of performativity to it.
Correct.
I would add (slightly anorak-ishly) that the treatment of inflation uplift on Index linked gilts should be excluded from the number.
Also, taxation of interest should be addressed. Interest income should be taxed at the same rate as labour (ie. income tax PLUS NI). Yes, I know most institutional investors don’t pay income tax but individual savers who are the ultimate beneficiaries DO pay tax.
Agreed
Does that £110 billion “interest” figure include the inflation-related amounts added the amount paid on redemption of index-linked gilts?
Look at figure 2 here (which by the way does a much better job of explaining this than it did a few years ago): https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/august2025
In August 2025, the government “paid” £8.4 billion of interest, but £2.6 billion of this “interest” (about 30%) is the “capital uplift on index-linked gilts”. In June 2025, this capital element was over 60% of the purported interest – £10.9 out of £17 billion.
For sure, this “uplift” represents a cost payable on redemption that should be accrued over term of the debt, but for no clear reason (apart from consistency with a stupid and distortive accounting standard) that “capital uplift” is required to be recognised and booked as “interest” immediately, even though it might not be paid for many years, even several decades. The longest-dated index-linked gilt in issue – paying a return of only 1/8 of one percent, i.e. 0.125% – is not due for repayment until 2073. There are also long-dated index-linked gilts paying a similar rate due for repayment in more that three decades – in 2056, 2058, 2062 (ok, this one is 3/8%), 2065 and 2068. About £55 billion of the debt.
That is fully 30% of the interest that is not really interest. Another 25% is owned to the government. So perhaps 50% of this so-called “interest” is not really “paid” at all.
It does include that sum. And you are right re the conclusion.
To put this another way: Rachel Reeves says £1 pound in £10 of tax revenues are paid to debt interest. The interest could be more than halved by (1) the Bank of England stopping its voluntary subsidy to commercial banks and ceasing payment of interest on most central bank reserve accounts (which is what many other central banks do) (2) recognising that about a quarter of the interest is paid to the government (on bonds held for the government through QE) so not paid in any meaningful sense at all (3) stopping the immediate recognition of inflation related capital uplift on index linked gilts as interest when the amounts will not be paid for years or decades (4) taking account of the tax paid on the interest by many recipients.
The figure would look very different if all of that was done. I’d guess less than a third.
Agreed
It would be a start if the numpties in the UK meeja asked Reeves & co some simple questions:
“can you owe yourself money? ” & given this is an impossibility – then why does the Uk gov, claim that it owes itself money? (= why does the BoE not simply cancel the gilts it holds).
“why are banks given free gov money – when there is none for hospitals etc (ref the CBRAs) – when will this stop?
“why not print money to invest in useful assets – given the UK gov owns the BoE”
& last but not least: why is there a requirement that to be in the UK meeja that you must be a brainless, dolt unable to ask the simplest of questions to gov wrt finance?
(I’m looking @ you Nick Robinson – you utter pathetic apology for a journalist).
I think you might havve upset her a little with your “peddling” of dangerous ideas about relaxing her iron-clad fiscal rules.
As Dick Emery used to say, “you are awful…”.
https://www.theguardian.com/politics/2025/sep/29/rachel-reeves-warns-labour-figures-against-ditching-idea-relaxing-fiscal-rules
She’s getting dedperate, she weaponised Truss again. Soon she will be carrying a cardboard cut-out of Truss to wave during speeches (made of ethically sourced, MI5 approved non-terrorist cardboard of course).
🙂
Reeves is like the cartoon character Andy Capp who once said:
‘Those that know the least, always know it the loudest’.
And as Joseph Heller said of one his characters’ (S)he was a self made woman who owed her lack of success to nobody’.
2. Cut the interest on central bank reserve accounts (CBRAs).
It has been estimated on this blog that all the reserves do not require the full interest rate. Approx only £30bn is required by the BoE to set daily interest rates, the rest could have a lower or no interest. A tiered interest rate is used at the ECB and the BoJ. Another unnecessary earner for the City.
Should be a no brainer.
But “its a Reform Ltd policy”, and there appears to be a complete inability of the current government to seek consensus about anything. Or why not “steal” reform’s policy and take some of the wind out of their sails?
As you’ve observed before, it’s worth paying attention to the demand for Treasury securities as an important macro indicator, while resisting it’s use as a rentier lever over Government funding or economic strategy . The rentiers only call the shots to the extent we allow them. So there’s no need to fear a Truss type crisis unless you’re beholden to her ideological commitments.
Could you point to an explanation somewhere of point 5, in words of one syllable? Thanks.
https://www.taxresearch.org.uk/Blog/2025/06/17/it-is-time-to-end-the-payment-of-most-interest-to-commercial-by-the-bank-of-england/
She has simply screamed from the rooftops…”I am a neoliberal!”
More subtly, she is – like Thatcher – an acolyte of Hayek.
I’d like to see MPs respond to Reeves by asking her why she will not take each if the steps you describe. They have to be brought out in the open in the House. Repeatedly. Maybe we should all ask our MPs to do so.
Your points 1 and 5 are the same: the CB reserve accounts are the counterpart to the BoE owned gilts. For the fact of BoE ownership of these gilts to mean no cost to the government, there would have to be no interest paid on CB reserves. So pt 1 = pt 5. Still a good pt though and we should definitely reduce interest costs to gov by addressing it.
Reiteration and restatement never harmed understanding.
“4. Tell the Bank of England to cut base rates… Those high rates are now simply a subsidy to the wealthy and are themselves inflationary.”
I understand the many and various reasons why reducing the base rate is important. I also understand how high interest rates are a subsidy to the wealthy and antithetical to a progressive and fairer distribution in society.
However, could you please explain how high rates are inflationary? The Economics that I was taught and can still remember was the current neoliberal orthodoxy, so that is my excuse for struggling with this one.
The payment of interest is built into many prices e.g. car leases, and also rents. So, high interest fuels prices.
Thanks – got it.
So because interest rates are baked in to many prices (or all too easily passed on to ‘consumers’) a higher base rate does not actually stifle demand but increases the cost of ordinary goods services. These are not actually luxuries but staples, or things that people need to get by, like needing a car to be able to drive to work/school, and having a roof over their heads for themselves and their families (including both rents and mortgage payments).
Now that you have explained it, it does look quite obvious, and I am embarrassed for not working it out or thinking critically.
(No need to publish this comment – I just wanted to acknowledge your response and say thanks. Please keep up the good work with the videos, explainers, and out-of-the-box thinking which is helping to move the arguments forward and onto the right issues).
Thanks
And I published because it shows what I think is obvious is not to people – and I need reminding of that. So, thank you
A bit late in the day – or next day. You don’t mention that the interest paid to the BoE on government bonds has been refunded to the Treasury since 2012 under Memoranda of Understanding. But worse, the Treasury refunds to the Asset Purchase Facility of the BoE any losses it makes on the sale of the bonds. I’m not clear whether Ms Reeves has taken either into account when calulating the real cost to the government.
I thought I had? If not, apologies.
Just hit back with the “so you’re a fan of unemployment and free money for rich people then”
🙂
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