AS THE Bank of England prepares to welcome its new governor, it is now an excellent time to assess the impacts of its policies. Of course, keeping short and long-rates artificially low and buying £375bn of gilts has increased asset prices for bonds, property and equities. Great news for the City, but what about the broader effects?
The Bank has so far failed to fully appreciate the social and distributional consequences of its policies. Monetary policy is usurping the role of fiscal policy – obviously by financing government debt, but also by redistributing national income and wealth. Inequality has increased sharply as a result of ultra-easy monetary measures that have acted like a tax cut for certain privileged groups, while imposing a tax increase on the majority of UK households.
Of course, many of us have benefited handsomely from ultra-easy policies. Homeowners with the largest mortgages and most expensive houses (mainly in the South of the country) and the wealthiest groups (particularly the top 5 per cent of the wealth distribution) have had a significant windfall, as would be achieved through a tax cut.
But there have been numerous losers, including youngsters struggling to afford rising rents in the South East (which result from artificially high house prices). Meanwhile, savers (especially those in parts of the country where house prices remain weak), older people with no debt, pensioners buying annuities or in income drawdown, and companies sponsoring final salary schemes have all faced falling incomes due to monetary measures, as would be imposed by a tax increase.
If George Osborne were to announce a tax increase on the young, the old, and middle income groups to fund a huge giveaway to the wealthiest households, or if he insisted on taking money from middle class families in the North to give more to borrowers and owners of large homes in the South, there would be an outcry. But when the Bank’s policies achieve a similar outcome, there is hardly any protest because the changes are less transparent. And Bank officials do not face the electorate, so they have escaped democratic accountability.
Support for mortgage borrowers has been an important policy aim, yet it is not clear that lower mortgage rates and higher house prices are essential for the economy. Only around a third of households actually have a mortgage. In fact, almost a third rent, while about another third own their home outright and therefore have not benefited from lower mortgage rates.
Further, buying gilts or increasing financial asset prices will not directly create growth – investing in real assets is more important. Indeed, artificially distorting supposedly “risk-free” assets may distort other asset prices, creating financial bubbles which will be painful when they burst, as they always do.
Although asset prices have risen, there is not enough money flowing to the real economy. QE is not a long-term solution, it is a short-term palliative, with damaging side-effects on young and old. In fact, there is plenty of money in the economy already, it is just not reaching the right places. Large companies are cash-rich, having raised cheap finance through the corporate bond markets, and institutional investors like insurers or pension funds have billions of pounds to invest.
These institutional assets could finance infrastructure and housing projects to create jobs, boost growth directly and normalise house prices. Increased housebuilding will offset supply shortages and reduce the pressure on rents that has been so problematic for the young. The government could offer companies incentives for new capital spending, such as “use it or lose it” temporary tax allowances for projects started in the next 12 to 18 months.
Ultimately, the UK economy is no longer in distress mode. Recovery is underway, so monetary life-support is not now required. Yes growth is slow, but that is due to the overhang of debts and the ongoing impairment of banks, plus the huge fiscal deficit. Some debts will never be repaid, and it is time to own up to this and slowly remove the monetary fix. Interest rates should start rising sooner rather than later so that borrowers begin adjusting to financial reality. Such low rates can’t be sustained and the longer they continue, the more distortions they create.
No doubt Mark Carney has other ideas, but I would urge him to consider the consequences of unconventional monetary policies before creating further inequalities.
Dr Ros Altmann is an independent policy expert and former government adviser.