Ros Altmann: Britain needs to take direct action to generate recovery

The problem for UK growth is not that interest rates are too high, or that there is not enough money around, it is that the money is failing to reach the parts of the economy that need it, in order to revive growth.

When patients are not recovering, good doctors don’t just keep on administering more of the same medicine that hasn’t worked, they look for a new cure. They will also look out for any serious side-effects that could be harming the patient as well.

Yet, the Bank of England is steadfastly sticking to the old treatment that has failed for four years. Instead of considering whether the side effects of the monetary medicine have been harming the patient, the Bank has ignored the damage being done to significant sections of the economy by its supposedly ‘expansionary’ policies.

Where has the £375bn of newly-created money actually gone?

Quantitative Easing – ironically the name of a well-fancied horse at the Cheltenham Festival – and low interest rates have helped borrowers with large mortgages, and banks have benefited hugely. Wealthy asset holders have done well.

This all sounds good, but what is being ignored is that, despite all the newly-created money (and the UK has created far more relative to the size of its economy than any other country), the incomes of savers and senior citizens have fallen sharply, while companies have had to pour billions into their pension funds rather than their businesses, as low rates push up deficits.

So, the new money has not helped huge sections of the economy and the policy itself has taken money away from millions of people, leaving them poorer, so they have cut spending and weakened growth.

Meanwhile, borrowers are not spending the extra money they have from lower mortgage rates and banks are still not lending to small firms, which are the lifeblood of the economy, so the policy of low rates is not benefitting the economy at large, only a few sections of it.

QE has artificially boosted house prices and increased rental costs, but this is not what the economy needs.

Of course, no-one wants to 
see home repossessions, but 
we need more construction of new homes and a more realistic house price level to help young people on the housing ladder or to afford rent, while admitting that some people may have borrowed too much in the past and may need to adjust their financial position.

Around four in 10 mortgages 
are interest-only – with many having no strategy for capital repayment – so low rates are 
just a politically expedient short-term sticking plaster, not 
a solution.

Low interest rates act like a tax increase on savers and pensioners, by reducing their income.

However, this effective tightening of fiscal policy has been achieved via monetary policy, so there has been no democratic debate.

New thinking is urgently required. We don’t need to create new money. There are billions in pension and insurance funds which, with a contingent Government/Bank of England guarantee, could be used to fund construction or infrastructure programmes and even direct lending to small firms.

The transmission mechanism from low rates to growth is broken, we need to bypass the banks to generate recovery, rather than hoping that bringing rates down further will do the trick.