Wonders never cease. I awoke this morning to hear that the Deputy Governor, Paul Tucker, had announced that consideration should be given to the Bank of England setting negative interest rates. Whatever next?
Anyone who had seen our current fiscal and monetary predicament, outlined in detail in my Centre for Policy Studies report today, is certainly likely to feel bemused.
By international standards British monetary and fiscal policy has been extreme. Interest rates, at 0.5 per cent, are already at their lowest rate in the 300 plus year history of the Bank. The fiscal deficit, at over 8 per cent of GDP, is far worse than during the 1970s crisis and much greater than the Euro problem children of Spain, France and Italy. The euphemistically named ‘Asset Purchase Programme,’ or money printing in plain English, now exceeds £350bn and is proportionately much greater than that of either the US Fed, or the ECB. You would have thought that the economy would be jumping out of its sickbed with such medicine. Actually Britain’s GDP performance is the worst of any G20 country, bar Italy.
When QE was launched the Treasury said it would be temporary, stimulatory and non-inflationary. It has been none of the above. Inflation has consistently exceeded the Bank’s targets, despite the worst recession in Britain since the 1920s. And the National Debt has increased from £534 billion just 5 years ago to £1162 billion today. In other words, what was accumulated in building and losing an Empire and winning two world wars has more than doubled in just five. And for what? Good schools, hospitals and powerful armed forces capability? Well, in Mr Brown’s imagination, perhaps.
This well intentioned policy, designed to prop up fundamental fault lines in the British economy, has failed to deliver on almost every metric it was designed for. Despite this, all the Bank of England can suggest is an even more extreme version of past policy. It is like the old Socialist mantra- ‘well, of course Socialism has not worked, because we haven’t had the real thing yet!’
The reality is that policy makers are trying to keep an overheated bubble on the road, rather than tackle the underlying malaise of a public sector accounting for virtually 50 per cent of GDP (up from 36 per cent of GDP in 2000/01 under Blair and representing over half of the economy in seven out of 12 British regions), a desperately poor productivity performance, and an overdependence on finance and property related sectors which are now inevitably in decline.
Worse, this policy has created arbitrary winners and losers. Funnily enough, the winners include the Government, as artificially low interest rates insulate HMG from the imperative of reducing spending, which continues to rise despite George Osborne’s austerity rhetoric; and the indebted, through negative real interest rates. If the problem was too much debt, it seems bizarre to encourage piling yet more on.
The losers have been the innocents of this recession. The young, who can neither get on the ladder of an artificially inflated property market and who will bear the burden of the enormous debts piled up by the Government. And savers and pensioners, who have done ‘the right thing’ only to see their wealth inflated away and annuity rates decline rapidly.
No, Mr Tucker. Savers, pensioners and the young have had enough. If Britain is to have any future the underlying malaise needs to be tackled. Supply-side reforms designed to stimulate private sector growth alongside fair, predictable and gradually declining taxes and firm control of public spending are the only long term sustainable choices available. Mucking around with helicopters and negative real interest rates merely delays the inevitable.
Ewen Stewart is a Director of the consultancy Walbrook Economics and is the author of Masking the Symptoms: Why QE and huge deficits are not the cure, published today by the Centre for Policy Studies.