So David Cameron says there is ‘no magic money tree’. In his big economy speech today, the Prime Minister said:
‘Now of course there are plenty of people out there with different advice about how to fix our broken economy. Some say cut more and borrow less, others cut less and borrow more. Go faster. Go slower. Cut taxes. Put them up. We need to cut through all this and tell people some plain truths. So let me speak frankly and do just that.
‘There are some people who think we don’t have to take all these tough decisions to deal with our debts. They say that our focus on deficit reduction is damaging growth. And what we need to do is to spend more and borrow more. It’s as if they think there’s some magic money tree. Well let me tell you a plain truth: there isn’t.’
The Prime Minister was clearly swiping at those who favour a demand-led approach, such as Ed Balls and Vince Cable, and those in his party who have been calling for unfunded tax cuts.
But he seems to forget that he is sitting underneath a really big magic money tree, one so magic and mystical that no-one quite understands it. As Fraser explains in this week’s Spectator, Cameron and George Osborne are relying less on Budget announcements and more on monetary policy to work magic on the economy. The Bank of England’s quantitative easing programme has created £375 billion of magic money, which keeps interest rates artificially low, thus engineering a recovery, or at least the illusion of one.
But this sort of magic money tree is more at home in a Grimm’s fairy tale than a modern one where everyone is destined to live happily ever after. Because not everyone’s a winner under QE. If you’re rich and you’re able to borrow, then you’re laughing all the way to the bank as it boosts the value of assets and keeps debt cheap (which is of course a useful thing for the government, especially as ministers can say ‘look, we know we’re doing well because we continue to enjoy low borrowing costs’). But if you’re prudent – a saver, or a pensioner – then you see the opposite happen.
Actually, no-one really knows what the long-term effects of QE will be, something those speaking at our Battle of the Chancellors in October acknowledged. So we don’t really know if there’s a happy ending to this tale of the magic tree.
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