The immense scale of the Bank of England's pandemic-era financial interventions is coming into sharp focus, with a new analysis projecting a staggering long-term cost to the British public. The programme, known as quantitative easing (QE), is now expected to saddle UK taxpayers with losses potentially reaching £200 billion.
The situation has ignited a fierce political debate, with Labour and other critics demanding the government reconsider its opposition to a windfall tax on banking profits, arguing that the public should not bear the full brunt of these losses while banks benefit.
How Quantitative Easing Turned into a Quarter-Trillion Pound Bill
During the 2008 financial crisis and again throughout the COVID-19 pandemic, the Bank of England embarked on a massive QE programme to stabilise the economy. It created new digital money to purchase hundreds of billions of pounds worth of government bonds (gilts), effectively pumping liquidity into the financial system.
For years, this was a profitable arrangement. The Bank paid interest on the reserves it created for commercial banks and earned interest on the government bonds it purchased. The profit was then transferred back to the Treasury.
However, with soaring inflation prompting the BoE to rapidly raise interest rates, the dynamic has violently reversed. The Bank now pays more interest to commercial banks on their reserves than it earns from its bond holdings, creating a perpetual loss-making machine.
The Political Fallout and the Windfall Tax Demand
This monumental transfer of public funds to the private sector has not gone unnoticed. Paul Nowak, TUC General Secretary, lambasted the situation, stating it is "outrageous that the banks are being let off the hook".
The Labour party is leading the charge, pointing out the bitter irony that high street banks are now reporting substantial profits, partly boosted by higher interest rates, while being the direct beneficiaries of these Treasury payments. They argue that a windfall tax on these excess profits could help offset the colossal QE losses for the public purse.
A Treasury spokesman defended the government's position, stating its focus remains on "reducing debt" and that the QE programme "was the right thing to do to support the economy through Covid". They also noted that the government has already implemented a permanent levy on banks, the Bank Surcharge.
A Long-Term Drain on the Public Purse
According to the National Institute of Economic and Social Research (NIESR), these losses are not a short-term anomaly. They are projected to continue for the foreseeable future, creating a persistent drain on public finances. The Institute for Fiscal Studies (IFS) estimates the net cost could settle between £30bn and £200bn over the programme's lifetime, depending on the path of interest rates.
This financial black hole means the Treasury will receive no more profit transfers from the Bank of England for years to come. Instead, it must find the money to cover the BoE's losses, ultimately impacting spending on public services, tax bills, or government borrowing.
The debate over who should pay for the aftermath of the UK's economic rescue mission is now set to become a defining feature of the upcoming general election campaign.
