No one can accuse the Bank of England of shying away from its responsibilities. Whether you’re a dove or a hawk, it’s impossible to deny that yesterday’s move was an exceptionally bold attempt to help the British economy deal with the fallout from June’s Brexit vote.
Attention has quickly turned to the government, with Bank governor Mark Carney and a chorus of economists calling on Downing Street to do whatever it can to avoid a recession. Carney sounded notably similar to his Eurozone counterpart “Super Mario” Draghi as he, quite reasonably, talked down the abilities of a central bank. “Monetary policy is more nimble, and it is appropriate to be the first responder to a shock,” Carney said yesterday. “[But] the biggest elements of the change are structural. Monetary policy can take those into account, but it can’t really do anything about those structural factors.”
He is quite right. Central banks can, at best, help the economy weather a storm – but they cannot deliver the so-called rising tide of steady economic growth.
So what should the government do? At times like these, the usual voices come to the fore, demanding higher spending and a debt-fuelled injection of money into various state projects. At the extreme end is Jeremy Corbyn, who one suspects is motivated more strongly by a desire for widespread state control of the economy than by any Keynesian theory. The Labour leader has pledged £500bn-£1 trillion of spending (he says this splurge will be funded by previously unattainable gains from tackling tax avoidance and by “expanding the economy”). Towards the more moderate end of the scale are people who would like a relaxation of plans to lower the deficit.
It is likely that chancellor Philip Hammond will edge away from his predecessor’s emphasis on fiscal consolidation. However, it is crucial to remember that George Osborne’s austere rhetoric failed to match reality. The deficit remains above £70bn a year, while the national debt is threatening to swell beyond the equivalent of 85 per cent of GDP. Instead of piling tens of billions of extra pounds on to the debt, the new Conservative administration should focus on bold supply side reforms to ensure that post-Brexit Britain is as competitive and dynamic as possible.