(Bloomberg) -- UK Chancellor Jeremy Hunt would have an extra £10 billion a year for tax cuts if the Bank of England stopped selling the bonds it bought over more than a decade under quantitative easing, according to BOE disclosures.

The UK central bank is winding down a portfolio of assets that reached £895 billion ($1.1 trillion) during its efforts to protect the economy from the pandemic and global financial crisis between 2009 and 2022. Most central banks are shrinking their QE portfolios, a process known as quantitative tightening, but the BOE is one of very few to be actively selling assets rather than simply letting them mature.

BOE Governor Andrew Bailey disclosed in a letter to the Treasury select committee last December that the government would save £100 billion by 2033, spread roughly equally across the decade, if active sales ceased. 

Such a move would give Hunt an extra £10 billion a year, on top of the £8.9 billion headroom he had at the March budget, enough for another 2% cut to National Insurance contributions. He has cut employee NICs by 4% since last November and has said his ambition is to get rid of the tax entirely.

Last week, the BOE revealed that UK taxpayers will have to pick up a £115 billion bill to cover the lifetime losses on the program under a guarantee agreed in 2009. The losses are caused by the bank paying a higher interest rate on money created to fund QE than it earns on the bonds bought.

The BOE is due to announce whether it will continue with its current QT arrangements on Sept. 19. At the moment, the bank is reducing the portfolio by about £100 billion a year and is keen to move quickly to create headroom in case QE is needed in the future. Under a purely passive strategy, the final bond would not mature until 2073.

Hunt has signaled he would like one final fiscal statement in September before a possible October general election, and has suggested that both income and property tax cuts would be on the cards to give the ruling Conservative Party a boost. The Tories are trailing the Labour opposition by about 20 points in the polls and suffered a rout in last week’s local elections.

The window for any change to QT could be tight, though. The Office for Budget Responsibility would have to sign off the policy at least a week in advance of a fiscal event. Alternatively, a future Labour government might benefit.

One factor that may influence the decision is when the BOE starts lowering interest rates. Active sales, which tighten monetary conditions, would clash with rate cuts, which loosen them. Investors have almost fully priced in a first quarter point cut from 5.25% for August. A cut is fully priced for September. 

Sanjay Raja, chief UK economist at Deutsche Bank, expects the bank to end active sales in September because “the effects of active QT could add to a tightening in financial conditions — working against the bank’s key monetary policy lever.” Imogen Bachra, NatWest’s head of UK rates strategy, also said active sales will be stopped in September.

Raja said: “In theory, eliminating the active part of QT would give the Chancellor some additional headroom.” He said the £10 billion estimate from the BOE document “looks broadly right.” 

The Treasury said in a statement: “There is little evidence that overall costs could be reduced by slowing sales, this would only lengthen the timelines and therefore increase interest costs.” The BOE separately said that “different unwind strategies do not necessarily change the lifetime profit or loss of the APF.” 

However, the bank’s own preferred “net present value” estimate of the costs of the program shows that ending active QT is better value for money than continuing with it. Members of Parliament have urged the BOE and the Treasury to take value for money into consideration when deciding QT plans.

Christopher Mahon, head of dynamic real return at Columbia Threadneedle Investments, said £10 billion may understate the savings for Hunt. He estimates that active sales raise long-term borrowing costs for the government by 0.4%, while the BOE says the impact is 0.1%-0.15%. 

Tomasz Wieladek, chief European economist at T. Rowe Price Group Inc., also believes active sales are driving up borrowing costs more than the BOE thinks. If the real cost is 0.25%, ending active sales would save the government another £600 million a year, Mahon said.

--With assistance from Andrew Atkinson.

(Updated with Bank of England comment in 12th paragraph.)

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