Falling Interest Rates Could Deliver £58bn Windfall for UK Public Finances
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Lower interest rates could improve public finances and allow for tax cuts by reducing government debt interest payments. £8bn could be saved for every 1% drop in Bank Rate.
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Lower gilt yields from lower interest rates could also reduce debt interest payments by £10bn by 2028-29 if yields fell 1%.
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Interest the Bank of England pays to banks on reserves is now far higher than income received on gilts purchased. This costs £40bn annually.
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Suspending interest payments on reserves could save up to £40bn, but risks losing control of monetary policy and damaging bank profits.
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A Labour chancellor may be more willing than a Conservative to suspend interest on reserves to claw back public finances, although not an ideal policy.