Goldman Sachs warned that tax increases are “inevitable”, as the legacy of quantitative ease from the Bank of England will be felt after the elections.
The American Investment Bank has stated that the losses from the quantitative easing program of the central bank will result in higher borrowing costs, and could force the next government into raising taxes more than they had planned.
The Bank of England bought bonds worth almost £900 billion to increase liquidity in the system during the financial crisis. After the pandemic ended, the central bank began selling these bonds.
Bond prices have dropped over the last two years, as central banks tightened their monetary policies. This has led to a rise in yields. Prices and yields are moving in opposite directions. Due to the soaring rates of interest, the Bank of England sells bonds at a deficit. The government funds the deficit. The Treasury contributed £44 billion to cover the deficit caused by so-called quantitative easing.
Goldman Sachs stated in a note: “Both major parties are committed to reducing debt as a percentage of output over the next five years. The next government must plan for a significant consolidation to achieve its fiscal goal.
The historical evidence indicates that the next government will likely change the current plan of how to implement consolidation. Both taxes and expenditures are likely to be higher.
According to a Bank of England analysis, the government must provide £170 billion in order to pay for its bond buying scheme.
The central bank also does not make enough money from its government bond portfolio to cover the interest payments made to banks that hold cash at Threadneedle St., which is set by the bank rate. Treasury covers the difference in the amount the Bank pays for commercial bank reserves compared to the interest it earns from government bonds.
In a report for Institute for Fiscal Studies, Sir Paul Tucker, former member of the Monetary Policy Committee, estimated that Treasury could save as much as £45 billion per year by reducing the interest they pay to banks.
Tucker stated in the report: “There is growing concern over the impact on public finances of borrowing at a floating interest rate, which may increase, perhaps sharply, when the Bank of England attempts to control inflation. The higher debt servicing costs will increase government borrowing and eventually lead to a combination of increased taxes and reduced spending on public services.
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