Britain needs a monetary policy fit for a booming economy

Allister Heath

SO what, exactly, is going on? Why does the UK still have crisis-level interest rates at a time when growth is roaring ahead? When will the penny finally drop?

Check out the evidence; it is pretty conclusive. The Confederation of British Industry believes that the economy will grow by three per cent this year and the National Institute of Economic and Social Research puts it at 2.9 per cent. The UK economy has probably just overtaken its pre-crisis GDP. Unemployment is falling. Regional purchasing managers’ indices and just about every other survey point to continuing or even accelerating growth. House prices are rising and are over-valued when compared to earnings in many parts of the UK.

So why are so many economists still so relaxed about the current, ridiculous state of affairs? Why are not more clamouring for change ahead of the Bank of England’s publication of its Inflation Report on Wednesday? There are several explanations: GDP may have recovered, but output per worker remains far below peak. Employment has bounced back, and there are skills shortages in many areas, but there is still plenty of unemployment and under-employment. Nominal GDP is growing nicely but isn’t rocketing. Inflation when measured on the consumer price index has fallen substantially. All of these factors together mean that many economists believe that there is still plenty of spare capacity in the economy, and that the policy status quo should therefore continue at least for another year.

I don’t buy it. The distortionary effects of low rates and the associated costs in terms of bubbles and misallocation of resources are now far greater than the benefits, especially with growth surging. We need a boom time monetary policy, and we need to start seeing it now.

LONDON is a world leader in many things, but it has now gained another title: it is billionaire central. A record 72 London residents now boast a fortune of over £1bn, more than in any other city in the world, including Moscow (with its 48 oligarchs) or New York (43). The UK as a whole is now home to 104 billionaires, according to research by The Sunday Times. Many were born overseas: 54 per cent in London, and 42 per cent of the UK total.

I have no problem with the increasing number of billionaires who reside in London. Their growth is a good thing, with no downsides; the many problems that Londoners of ordinary means now face are unconnected to the increased number of super-rich.

Consider the alternative: would the UK and London economies, and thus members of the public, be better off if these billionaires didn’t live here? Of course not. The uber-rich employ lots of people – either through their businesses, which the UK desperately needs to attract, or directly and indirectly by spending on staff or services. They pay vast amounts of tax, regardless of whether they are non-doms or not – stamp duty on a £10m house is £700,000, for example, and 20 per cent Vat soon adds up when you are splashing out on luxury goods and cars. They help to finance the arts and culture.

What about housing? The super-rich have snapped up properties in expensive areas, pushing up prices, but also improving the quality of high-end property and employing thousands of construction workers. But many are also financing the construction of many more homes by providing capital, and the health of the Kensington housing market is irrelevant to the lives of almost everybody else.

What struggling Londoners need are tens of thousands of additional new homes a year, within reasonable commuting distance; a massive increase in supply would push down prices. It is absolutely true that many Londoners are facing a cost of living crisis – but it would be even worse were the billionaires to be driven away.
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