Today’s package of measures from Bank of England fails on inequality
The Bank of England’s interest rate cut from a historic low of 0.5% to another historic low of 0.25% was expected. In the context of some disappointing economic data and Mark Carney’s earlier commitment to action it was inevitable that some action would be taken. In addition, and more unexpectedly, they announced £60 billion in further quantitative easing (newly created money to buy bonds from banks in an attempt to stimulate the economy), £10 billion in buying corporate bonds, and launched a new programme called the Term Funding Scheme, worth £100bn, to encourage Britain’s banks to lend to businesses and consumers.
There is a lot of conventional debate going on about the impacts on the pound and the stock markets, borrowers and savers. That is, borrowers gain from lower interest rates (as long on flexible rates and that rate cut is passed on to customers) and savers lose. At Class, we’re also interested in the more granular detail of which social strata will win or lose because of today’s package of measures. We’re also keen to remind everyone that any responses to Brexit should (a) learn from past mistakes, most notably the impact of quantitative easing on asset inflation and related increase in wealth inequality; (b) try to deal with the root problems in the economy that were clear before the Brexit vote, in particular growing unsustainable household and private debt.
The economic impact of Brexit is still unclear. While some data, in particular the GDP figures for the second quarter of this year have been better than expected, other data such as the Purchasing Managers’ Index (PMI) has shown sharp falls in orders and delays in projects across construction and services which point to an economic slowdown. The hope is that any sort of a slowdown is both shallow (lower growth rather than negative growth) and short term, but the extent of this economic slowdown will of course depend on policy. As such, it was the right decision for the BoE to take action today, especially given that the government is yet to offer any solutions.
However, the measures are a bit desperate and unhelpful from an inequality perspective, an ‘anything to get the economy moving again’ type approach. Many expect the impact of the interest rate cut to be limited. Yes, those with tracker or flexible-rate mortgages will have a bit more money in their pocket but this will be offset by inflation rises. And what about the 36% of households who are renting and don’t own the roof over their heads? Young people already struggling will not gain from this change and of course pensioners and pension funds will suffer.
Of course today’s move is done to increase the confidence of businesses and consumers to keep the economy moving. But this comes at the expense of household and private debt. British household debt has risen, and is dangerously close to pre-financial crash levels. Total debt, including mortgage, per adults is now £29,266, around 112.9% of average earnings. As we have learnt before, debt-fueled growth is unsustainable. Today’s announcement will only make us more reliant on debt.
In light of this we want to see our monetary policy makers thinking more creatively. A number of well-known economists, several of which who predicted the financial crisis, have written a letter asking for innovative solutions, such as funding direct cash transfers to households. To address economic uncertainty, inequality and put the UK economy on a more sustainable pathway, we’d like to see a package of monetary and fiscal tools. The Bank of England can only do so much, especially given that interest rates are already so low. We need a fiscal programme to tackle regional inequalities, a cut in VAT to put money in the pockets of consumers without increasing debt and a quantitative easing progamme that funds a house building or greening programme of investment that would create good jobs. While these ideas do need to be explored further to ensure there are no unintended consequences, there must be a recognition that business as usual will not suffice. Unfortunately the package announced today will not deliver an economy that in Theresa May’s words ‘works for the many, and not just the privileged few.’