Reform UKs Letter to the Bank of England

Promises after promises that appease all. Led by the Unionist and Brexit supporter Nigel Farage, The party is increasing in headway all across Britain. The main reason it is able to do so is through its policy proposals that promises a land of milk and honey to the working class.  It tends to take from every playbook , left and right. Be it nationalising failed industries like British Steel and Reducing taxes for all by moving the income tax criteria , removing stamp duties for homeowners , more spending on Social care, health service, scrapping of the tv licence fees etc are proposed.  Reform UK has been able to capture the politics of Britian more so the ruling Kier Starmer’s Labour party government has declared it as the ‘real opposition’. But how has Reform proposed to fund all this ? If reform were to come to rule Britain, how will it prevent a similar or worse scenario like the one that Liz Truss went about doing in her mini Budget which brought about a fall in the value of the Pound and a selloff in the bond market (government debt market) and home buyers facing a sudden increase in costs and would have de facto brought about the fall of the Britain’s economy without the intervention from the Bank of England.

Just to give a quick overview of how finances work in a country. 

The government taxes , levies and creates revenue through growth and government debt (expectations for future spending) and spends this money on social needs such as education , health care , infrastructure etc. 

Reform’s funding plans for this ‘Paradise’

So How does Reform plan to fund this paradise that it has is envisioned? Two main ways are proposed, one is reducing public spending on wasteful expenses (DoGE of Britian)  and stopping the  payment of interests for deposits held by commercial banks at the Bank of England. 

Reduction of public spending has already failed in the other side of the Atlantic with Doge and Elon Musk unable to bring any major reduction to the spending  and more he tried to reduce it and target social security spending , it ended his time in the Trump government and destroyed him politically (Wisconsin elections loss which he funded , and rift with Trump and the Big beautiful bill). How to Bring about a reduction of so-called wasteful spending in the UK is still not clear from Reform UK. 

Now out of the two main revenues, the one that everyone seems to agree on is the interest payments to the Commercial bank deposits held with the Bank of England for Quantitative easing (bond buying program) and otherwise.  

Richard Tice , The deputy leader of Reform, a real estate Mogul has proposed this via a letter to the Bank of England recently to stop the interest paid to commercial banks calling it only satisfying ‘city institutions’ and wasting billions of pounds of taxpayers money. He also wants to stop Quantitative Tightening (selling of government bonds by the BoE in the secondary market) calling it unnecessary losses on the taxpayer.

Reform plans to save close to £35 billion via this route. Independent Institute of fiscal studies a widely recognised think tank although agreeing with this view have stated that Reform will not be able to match the numbers as it stands.

Deposits held by the Bank of England – the Legitimacy of currency

The deposits held by the commercial bank in the bank of England (BoE)  are what values the money we hold. When the central bank makes debit purchases of the government bonds (Quantitative Easing), it also increases its liabilities, i.e. increasing the deposits held which are the reserves from the commercial bank. We need to note that these are not money created out of thin air like how Mr. Tice states in his letter. These are actual savings from depositors into the commercial bank which in turn end up with the Central Bank as reserves. This money is in fact what legitimizes the Pound sterling. When commercial banks transfer Money from one bank to another bank through RTGS , this money which is deposited in the central bank is how it is settled in the end by being moved across between bank accounts held by commercial banks in BoE (creating a record in accounting) . This deposit of hard earned wages by working class people is what values money and keeps it as one. The Pound sterling in Edinburgh, Manchester, London is all one and the same in value because of this deposit held in the central bank. 

Stopping the interest rate paid for holding these deposits would not only weaken the system but also make the Banks to source their need for money from other sources such as the Money Market Funds which are held by commercial banks ,  Private equity and other non-regulated financial institutions. The European Union which has stopped paying interest for some commercial Bank deposits have a Money market fund Market Size of (€1.4 trillion) compared to the UK which doesn’t do this and is smaller (£500bn).

Mr. Tice and Reforms UKs end plan is to give complete control of hard earned wages and savings of the Taxpayers into the hands of private individuals and institutions whose only purpose is profits . 

Why government cost of debt increases ?

The increase in Government debt costs is not due to this policy from the BoE but because of Covid spending which put public expenditure to unexpected levels across the world and also due to budget or spending plans by the government which is driven by unrealistic reasoning , similar to Tory Liz Truss's Mini Budget of tax reductions with no plans to cover for it or the recent Conservative Merz’s German government's spending plans for billions of dollars for building defence and related infrastructure with no war in sight (German bund yields have seen increase due to this). 

What is a Good Solution

The real problem isn’t the BoEs Monetary policy — but it’s that commercial banks and other financial institutions make obscene profits during any event yet contribute little back. Global banks raked in $225 billion in trading revenue last year, even more than during the Ukraine war. When markets swing—like under Trump’s tariffs proposal—banks pocketed $37 billion in just a weeks’ time as per the financial times.

The perfect solution would be to banks / financial institutions to share their excess profits through a windfall tax or pass laws that make them fund council housing and poverty relief via social responsible initiatives. This could generate billions—enough to build thousands of council homes or boost the lives of struggling families and eradicate child poverty in UK . In order to understand the magnitude here , The Labour government was looking to save just £1.2 billion per year by scrapping the Winter Fuel Payment for pensioners as part of their broader cost-cutting effort. Compare this to the trading revenues by banks and financial institutions and one can understand the impact.

- Sennaya Swamy Naickar