The Bank of England has caught up with the rest of the economic forecasting world. Yesterday it acknowledged that its previous UK growth forecasts were too optimistic. 2012 is going to be a disappointing year.
There is almost universal agreement amongst the political parties, Central bankers and the rest of the UK financial establishment, that the UK economy needs to grow again. Envious eyes are cast across the Atlantic to the USA, experiencing slow but sustained growth since the Credit Crunch. Their combination of lower tax rates, bigger cuts in public spending at the State level than the UK is attempting, and mended banks, is working better than our policy mix for the time being.
This autumn the Coalition will relaunch itself, shorn of the large problem of Lords reform. Instead of using up political capital and a lot of Parliamentary time on a reform which had many critics, they have a chance to revisit the economic policy and do what it takes to push the economy into growth. So what should they do?
Readers of this site will know I have long favoured the strategy of cutting the deficit primarily by spending reductions. The government said this would be their approach, but they put up overall public spending instead. This needs to be allied to sorting out the problem banks quickly and setting competitive tax rates that people are prepared to pay. This still makes sense. Income tax revenues have fallen too far, thanks to the higher rate. New enterprise and business has been put off by the tax and regulatory regime. Private sector demand has been weak owing to high tax rates and higher inflation than was desirable. The government said it planned to squeeze the public sector, but squeezed the private sector instead.
I have not been a great fan of the Bank’s Quantitative easing programme. I have always argued that with broken banks there is no easy transmission mechanism to get the money created into the private sector to fuel the recovery. If there were then they would need to be careful about overdoing it and triggering inflation. Keeping the state’s borrowing costs down is marginally helpful but it does not send a signal that we need to shift resources and activity from public to private sectors, to tackle the deficit problem. It has allowed the state to go on spending well beyond its means. It has not lifted us into growth despite the positive contribution to growth as officially defined by the rise in real public spending. Nor is it right to say it is loans and credit, rather than money we lack. The private sector is squeezed of cash, but parts of it remain highly borrowed.
As the Bank clearly wishes to address the shortage of money by creating large quantities,why doesn’t it use the newly printed money in the private sector instead of providing cheap funds indirectly to the public sector? I hasten to add I am not advocating this policy. Did they look at the Japanese experience both of QE and of giving money directly to voters to spend? Tomorrow I will look again at a tax based stimulus, the approach I favour. This would lead to a lower, not higher, deficit.