So the Bank of England has cut interest rates again, to 0.25%, as ‘the outlook for growth in the short to medium term has weakened markedly’. It is also pumping £70bn new money into the financial sector, that is ‘monetary easing’ or ‘printing money’. Meanwhile, the government is denouncing businesses for running deficits on their pension schemes. These two, apparently unconnected, events are very much two sides of the same newly minted coin.
The last two governments, led by the Conservatives, have presided over a weak economy recovering from the financial crisis, arguing that the prime economic problem has been the budget deficit, necessitating cuts to government expenditure. They have left it to the Bank of England to boost the economy, by lowering interest rates and printing money. However monetary easing has had only limited impact. If people or businesses are worried about the future, and indeed the impact of government expenditure cuts, they won’t necessarily spend more, whatever the cost of debt. As the economy therefore grew more slowly than forecast, and consequently tax revenues languished, the budget deficit remained stubbornly high. Meanwhile the Bank of England has had to cut interest rates even further and pump even more money into the economy. The logic is to end up at zero interest rates, perhaps not so far away now.
However, even the Bank of England has now admitted that its monetary expansion is having limited effect now. Explaining the recent fall in growth estimates, it admits; ‘Much of this reflects a downward revision to potential supply that monetary policy cannot offset’.
Recent governments have refused to use their fiscal armoury to boost the economy, because of the supposed need to reduce the fiscal deficit. ‘You cannot spend beyond your means’, they still say. That is dogma, not economics. Of course you can – by borrowing. If you use that spend to boost the economy, the increased growth and jobs will provide the tax revenue to pay back that debt. How different is this really to printing an extra £70bn new money?
Actually, it is a lot different. If the government boosted the economy by increasing infrastructure spend or increased NHS funding, there would be an immediate boost to jobs and investment. With 10-year gilts now at 0.6%, it wouldn’t take much of a return on infrastructure investment to deliver a positive project benefit, even aside from the general economic boost. Increased NHS funding would deliver significant social benefits, as well as reducing sickness.
On the other hand, low interest rates have reduced mortgage costs and so pushed up house prices. High house prices may make the middle class feel good, but do nothing for the economy. In fact, their main result is to transfer wealth from younger, first-time buyers and renters to their parents and grand parents. This stealth wealth redistribution is no different to raising taxes on the young and the less well off, and then giving tax breaks to the middle class. Except that the government then describes the resulting reduction in home ownership as a crisis, which it blames on house builders and buy-to-let landlords.
The other big losers are company pension schemes. Longer life expectancy and recent poor investment returns have increased pension deficits. But so have low interest rates. Not only do they reduce expected returns on pension investments but, in a double whammy, they also reduce the discount rate on pension liabilities. Has the government admitted its role in the pensions crisis? No, it has condemned companies struggling to pay ever-higher contributions to largely closed legacy schemes.
Governments prefer monetary expansion over fiscal stimulus, partly because it enables them to blame others for the consequences. Printing money and reducing interest rates are down to the independent Bank of England. Fiscal deficits are the fault of the dim and distant Labour administration. The housing crisis is due to land-banking house builders, greedy landlords and banks not lending. Struggling pension schemes are due to corporate greed and governance failures.
Philip Green, for example, has a lot to answer for BHS’s 13,000 pensioners. But so has the government, and it’s time it accepted responsibility too.