(Bloomberg) -- Investors are starting to worry that a future Labour government could seek to raise money for public services by reducing the amount commercial banks earn on deposits held at the Bank of England, analysts at UBS said.

Gordon Brown, the former UK prime minister and Labour Party leader, last month proposed changing the rules around the BOE’s quantitative easing program in a sign that Labour might copy European Central Bank-style “reserves tiering” if it wins the election expected this year, as opinion polls project.

That would involve reducing the interest paid to commercial lenders on hundreds of billions of pounds of deposits created when the BOE was buying bonds to support the economy. The proposal, described by BOE Governor Andrew Bailey as a tax on the banks, could raise around £1.5 billion ($1.9 billion) for the Treasury.

“We’ve had questions from some investors around the potential implementation of tiering in the UK after the next election,” Jason Napier, an equities analyst at UBS, said in a note to investors. 

UBS estimates that a UK version of the ECB model would cost the major banks about £200 million each a year. There are eight big UK lenders, including Nationwide Building Society.

Whoever wins the next election will need to find savings as they face huge fiscal pressures. The tax burden is on track to reach its highest level since 1948, yet public services are creaking after years of underinvestment. 

A doubling in debt-servicing costs since the pandemic due to sky-rocketing debt and high interest rates has intensified the problem. Changing the BOE’s monetary policy arrangements would help, by reducing debt costs rather than raising rates. 

QE, which peaked at £895 billion, has become a problem because the BOE pays interest on the reserves created between 2009 and 2021 to fund the scheme. The BOE makes a loss when rates are above 2%. They are currently 5.25%.

Under a state guarantee signed in 2009, the taxpayer covers the loss – effectively making a transfer to high street lenders. The Office for Budget Responsibility estimates the lifetime loss from QE will be £104 billion.

Napier pointed out that, unlike the BOE, central banks in Sweden, Denmark and Switzerland as well as the ECB pay zero interest on a portion of the reserves. At the ECB, no interest is paid on a “tier” equivalent to 1% of a lender’s domestic customer deposits.

Napier said the same policy would work in the UK but hit bank profits. Banks would be expected to raise mortgage rates and lower savings rates to “recover lost income” by passing the cost on to customers. 

Paul de Grauwe, a professor of political economy at the London School of Economics, has argued that this would sharpen the transmission of monetary policy and help restrain inflation.

Bailey has said there is no need to change the current arrangements so any decision would be for the Treasury. Chancellor Jeremy Hunt told lawmakers last month that he is “not considering” the proposal, which he said could impact “the competitiveness of British banks.”

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