QE was fun while it lasted. Now it’s time for the cuts

As the next edition of the Coalition’s spending programme is released, it's time to set out on the road back to monetary sustainability - and it's not going to be easy.

Share

The fiscal squeeze goes on; the monetary squeeze is about to begin. Tomorrow we get the next edition of the Coalition’s spending programme, extending the cuts on public spending beyond the election. It is a familiar journey, this road back to fiscal sustainability, albeit one that is proving more protracted than most people expected.

But in the past few days, we have been made aware of another journey that we are going to have to make. This is the road back to monetary sustainability, a world with normal interest rates and where the central banks no longer print the extra money to pump into the economy. The trigger was a speech by Ben Bernanke, chairman of the Federal Reserve Board, that the Fed would probably start to cut back on quantitative easing later this year and end it next. Long-term interest rates shot up around the world in response. A month ago, the UK Government could borrow for 10 years at 1.9 per cent; now the rate is 2.5 per cent.

The two stories are linked, in that higher interest rates put an additional burden on taxpayers, because money going on interest is money not available to spend on public services.

Perhaps the best way to see our fiscal squeeze is in the context of the rest of the developed world. We are about one-third of the way back to a deficit of a sustainable level, with one that is still about the largest of any major economy, around 7 per cent of GDP. We are consolidating at much the same speed as other countries but because we started higher than anyone else, it will take longer. Our tax revenues have been  37-38 per cent of GDP for the past 25 years, and since the early 1980s, when the oil money was flowing in, no government has managed to increase that proportion. But our public spending peaked at 48 per cent of GDP. Big gap.

The better news is that we hit the recession with a relatively low stock of debt, and the further better news is that the average maturity of our national debt is 14 years. That is about the longest in the world; the US average maturity is less than six years. So any rise in interest rates will affect us more slowly than it will other countries.

That leads to the second story. In response to the recession, all the central banks in the developed world have driven down interest rates to near-zero levels, and most in one way or another have further boosted monetary growth by quantitative easing. The logic is that you cannot have rates below zero, so that just leaves creating more money.

The Bank of England owns about a third of the national debt, having bought it off the markets, exchanging the debt for cash that it has created. The mechanism in the US is slightly different, and in Europe slightly different again, but the aim is the same.

But an easy-money policy cannot go on forever and we are already seeing adverse side-effects. If banks give virtually no interest, people take their money out and put it elsewhere. So asset prices rise while banks have even less money to lend. In any case, this very easy money policy seems no longer to be effective in boosting the economy. The evidence is mixed, but it seems to be that while the initial bout of QE helped steady things, subsequent bouts had less impact.

Common sense says you can’t just print money and expect everything to be hunky-dory – so the safe thing to do is to start cutting back as soon as you dare. That is starting to happen now.

Let’s go mad for Manchester – and beyond

Is London too big? There’s a continuing debate over how London’s wealth and influence could be spread better across the nation. Not only are there tight curbs on growth in London, but the Government has forced its departments (and the BBC) to move people out. But London has gone on growing.

Now some work by the LSE suggests that the problem is not that London is too big, but rather that Britain’s other cities are too small. Professor Henry Overman, director of its Spatial Economics Research Centre, has concluded that we should allow successful provincial cities such as Manchester to grow even faster by loosening planning controls and improving education and other services there.

Manchester has seen the fastest growth outside London and the South-east, but as it has grown its housing costs and office rents have risen. That has choked off further growth, because skilled workers are mobile and find themselves forced to move out by these higher costs. What happens to provincial cities that are not so successful is another matter, but the general principle that you reinforce success surely is a good one.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Business Analyst - Surrey - Permanent - Up to £50k DOE

£40000 - £50000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***ASP.NET Developer - Cheshire - £35k - Permanent***

£30000 - £35000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***Solutions Architect*** - Brighton - £40k - Permanent

£35000 - £40000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

Senior Research Fellow in Gender, Food and Resilient Communities

£47,334 - £59,058 per annum: Coventry University: The Centre for Agroecology, ...

Day In a Page

Read Next
 

Taking on Ukip requires a delicate balancing act for both main parties

Andrew Grice
Today is a bigger Shabbes than usual in the Jewish world because it has been chosen to launch the Shabbos Project  

Shabbes exerts a pull on all Jews, and today is bigger than ever

Howard Jacobson
Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker