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

Recruitment Genius: Business Development Manager / Sales - OTE £45,000

£35000 - £45000 per annum: Recruitment Genius: This company is a solutions / s...

Recruitment Genius: Sales Executive - OTE £45,000

£18000 - £45000 per annum: Recruitment Genius: A Sales Executive is required t...

Recruitment Genius: Test Development Engineer

£35000 - £40000 per annum: Recruitment Genius: Are you inspired to bring new a...

Recruitment Genius: Trainee Motor Engineer

£14000 - £18000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
Kennedy campaign for the Lib Dems earlier this year in Bearsden  

Charles Kennedy: A brilliant man whose talents were badly needed

Baroness Williams
Nick Clegg (R) Liberal Democrat Leader and former leader Charles Kennedy MP, joined the general election campaign trail on April 8, 2010  

Charles Kennedy: The only mainstream political leader who spoke sense

Tim Farron
Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific