The concern the Treasury has is that if interest rates rose to say 2 per cent (which would be enough to probably precipitate a major personal debt crisis in the UK) then the cost of serving these central bank reserve accounts might become £16 billion a year – enough to pay for all the catch up education required in the UK.
Sunak is obviously now holding back the money needed for children’s education to pay this interest cost to keep banks happy.
But I entirely agree with Prof Holtham that this is completely unnecessary. Simply redesignate the sums as special deposits and require that the banks hold them (which the Bank of England has the power to do, and which it has done in the past) and then pay zero interest rate on them and the problem of interest rate costs is solved.
What is more, effective government debt is reduced by more than 30%.
OK, so, say interest rates rise to 5%. We’ve been there before, obviously. That’s now £40 billion a year. Hmm. And we then get to a problem because that’s – no, I’ve not checked but let’s just assume for the sake of argument – something like the entire profits of the domestic, retail, banking system.
So the banks do have to pay out interest to those who have deposited with them. But now we’re to say that £800 billion – or whatever – is, by law, not to pay them any interest?
Oh, cool, we’ve just bankrupted the retail domestic banking system. Aren’t we clever boys and girls?
Or, of course, the banks stop depositing at the central bank, V rises substantially and hello inflation!