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MNI INTERVIEW: Bank Tax Better Than Tiering- Ex-BOE Deputy
The UK Treasury would be more likely to favour a tax on banks to compensate for rising debt interest costs than for the Bank of England to cut the interest it pays on reserves, former BOE Deputy Governor Charles Bean told MNI, adding that the increasingly mooted option of tiered remuneration would risk the appearance of fiscal dominance if introduced now.
With bonds bought by the BOE during its quantitative easing programme paid for with reserves which are remunerated at Bank Rate, the cost to the public sector of servicing its debt rises as monetary policy is tightened. One suggestion, made by another former deputy governor, Paul Tucker, and others, would be for the BOE to reduce the interest paid on a portion of reserves. But the introduction of a tiered system at a time when the government is very publicly battling to find ways to get debt-to-GDP on to a declining path, would give the impression that the Bank had come under Treasury dominance, Bean said.
Instead, he suggested, it would make sense for the government to introduce a temporary tax on banks equivalent to the hit they would take to their revenue from reserve tiering. The Bank could look again at switching to tiering once public finances are less stressed, Bean added. (See MNI INTERVIEW: Good Case For Reserve Tiering- Ex-BOE Official)
“The risk with doing it now would be that it would look like fiscal dominance, the Bank doing this to get the government out of a public financing hole, If you did it in tranquil times, or when Bank Rate was much lower, it wouldn’t have been an issue. Doing it now looks like the Treasury has lent on the Bank,”" Bean said, speaking to MNI following a Resolution Foundation event.
“That is the reason why if you want to go down this sort of route … you might want to do it by having a temporary (windfall) tax on the banks. It is much more straightforward to implement,” he said, adding that "Were the Treasury to want to go down this route I think they would do it with the bank tax."
From the Bank's perspective, however, in the longer-term restructuring reserve remuneration on its bloated balance sheet may be more attractive. The sums involved are very large, with a recent paper by Tucker stating that with the quantitative easing stock at over GBP800 billion, tiering could cut debt interest costs by between GBP30 billion and GBP45 billion over each of the next two fiscal years.
"When you get to the point that Bank Rate is equal to the average yield on the gilts, which is about now ...(and then it) goes higher so it will get to the point the Bank is receiving money systematically from the Treasury. One thing that worried us, although there is nothing problematic about the economics of this, is the optics," Bean said.
In the meantime, as the Bank's QE vehicle, its Asset Purchase Facility, moves from surplus to deficit, payments of GBP10 billion or more from the Treasury to the BOE each year could become the norm.
"The press could spin it an unhelpful way, asking ‘what right have the MPC got to do this?’ and so on. So, from the Bank's point of view you might argue there would have been an advantage in actually structuring reserves, particularly as they have got so big," Bean said.
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