Reform’s make-believe manifesto is textbook populism

Hurrah! There is such a thing as a free lunch after all. Or so Nigel Farage’s Reform UK seems to have concluded.

And there we were thinking there might be a bit of economic realism in “Our Contract with You”, otherwise known as Reform’s election manifesto.

Instead of which Reform’s policy wonks seem to have been infected by an even greater degree of magical thinking than their three mainstream political rivals.

Amid a scarcely believable smorgasbord of tax cuts, spending increases and spending reductions, Reform proposes to cancel the payment of interest on central bank reserves, a measure which it thinks will save the Government £35bn a year.

Never mind that most outside estimates put the savings at considerably less, and that these costs will in any case shrink in the years ahead, eating away at the amounts available for spending on other things.

As far as we know, there is no such plan in contemplation by either the Tories or Labour, tempting though it is to regard the interest on reserves as a completely painless form of spending cut. And yet here we see this old canard resurrected as a foundation stone of Reform’s tax and spending plans.

To fund its proposed tax cuts, the party needs to find big savings in government spending. Of the £146bn of spending cuts that Reform suggests, cancelling interest payments would be the second biggest of them, amounting to nearly a quarter of the total.

Since a vote for Reform is essentially just a protest vote, the practicalities and unintended consequences of policies like these don’t really matter. Farage can spout whatever nonsense he likes, confident in the knowledge that he won’t be tested on it in practice.

Yet by proposing such an idea, Reform demonstrates that it has fallen victim to the same delusions as it decries in its mainstream rivals. The underlying reality is that Britain is drowning in debt. But nobody seems willing to confront this disagreeable truth with a credible plan for putting things back on a sustainable footing.

Labour feigns fiscal responsibility but proposes nothing beyond the make-believe of superior economic growth to deliver on what are likely to be a growing list of spending commitments.

The Tories do at least promise limited spending cuts, but fail to say what they are – and in any case, are still left with a national debt of close to 100pc of GDP and very little prospect of managing it lower before the next big economic shock comes rolling in.

But Reform’s tax-and-spend agenda goes above and beyond. It is, I fear, pure fantasy. Any such programme – if by any chance Reform was elected to government – would face an immediate Liz Truss moment, for on no level is it credible.

What are at the moment surprisingly compliant bond markets would immediately go into meltdown, leaving a bewildered Farage to claim impotently like Truss before him that he’d been another victim of deep state Remoaners.

At the risk of repeating what my fellow Telegraph columnist Roger Bootle has already said earlier this week about the perils of cancelling interest on central bank reserves, here’s the problem: in essence it would amount to straight debt monetisation and would as a consequence be punished by markets with a corresponding degree of monetary devaluation.

At the very least, you’d find that it was a zero-sum game, with tax pounds eventually buying less than they used to.

Worse, it could lead to a wider loss of confidence in the UK economy, destabilising the banking system and government debt markets anew.

I’ve heard it said that, on the contrary, once deprived of the easy money of the 5.25pc Bank Rate on central bank reserves, commercial banks would be forced to withdraw their money from the Bank of England and buy higher-yielding assets with it instead.

Market interest rates would fall and there would be a boom. It scarcely needs saying that this would negate the purpose of higher interest rates in the first place, which is to bear down on inflation.

More likely, however, is that commercial banks would find ways of protecting their profits by widening the spread between deposit and lending rates. Depositors would get less for their money than otherwise and borrowers would pay more.

There has admittedly been support for versions of the idea from some top-level members of the economics profession, including two former deputy governors of the Bank of England, Charlie Bean and Paul Tucker, and a former chairman of the Financial Services Authority, Lord Turner.

But few that I am aware of go quite so far as Reform, preferring instead a tiered approach similar to that pursued by the European Central Bank, which pays no interest on minimum reserves held for regulatory purposes.

Personally, I would favour an immediate halt to the Bank of England’s programme of quantitative tightening, where gilts are sold back to the market at a loss.

This is not quite as egregious a policy mistake as Gordon Brown’s decision to flog off the nation’s gold reserves at a knockdown price, but it’s not far off.

It is simple common sense that you do not sell for less than you paid unless forced to. The Bank is under no such obligation yet it continues to do so, limiting the Government’s fiscal headroom accordingly. It might therefore be deemed as interference by the Bank in fiscal matters that should be no part of its concern.

Yet neither of these approaches would deliver anything like the savings Reform hopes to get from the complete cancellation of interest on reserves.

Britain is cursed by a persistent vein of anti-banker sentiment, which populist policy such as this taps into. If there is one stereotype that persists as a hate figure down the ages it is profiteering bankers and financiers.

This is understandable on one level. The damage caused by the last banking crisis has left a deep scar on the public consciousness. But though bank-bashing may win votes, it doesn’t do the economy any good.

Reform may be a world away in terms of its political ideology from the Liberal Democrats, but in this regard the two are much the same.

Farage proposes to tax reserves, or rather break with contract to cancel the payment of interest; the Lib Dems propose to tax the banks more on their profits instead. It’s the same populist agenda at root.

In both cases, it damages the banking system’s core purposes of maturity transformation and of lending to support economic growth. In neither case will it help the country get on top of its mountainous debts.

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