Christine Jardine condemns winddown of furlough

Liberal Democrat Treasury spokesperson Christine Jardine has warned that thousands of businesses are facing uncertainty as furlough begins to wind down and the business rates holiday ends, while restrictions remain in place.

How are businesses supposed to have confidence in a Government that promised to do whatever it takes, but is withdrawing support too soon? Now thousands of businesses are being left facing reduced support while still unable to operate fully to pay their bills.

This gap before the next possible lifting of restrictions could be crucial for many of them.

Bounce back loans are creating an extra burden and the Government needs to come up with a way of making that easier to repay.

Liberal Democrats warned the Government to think about business needs when restrictions were extended, but the Chancellor’s decision to wind down support anyway is a dereliction of duty.

It’s painfully clear that ministers have no long term plan for small businesses and the families who depend on them.

The danger now is we could face a wave of closures and redundancies as schemes end, heaping more misery on those already struggling and damaging the UK economy.

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  • I think if there is to be an extension of support it needs to be tightly targeted on small business and focused on sectors that have been hardest hit like hospitality and leisure e,g, by a further extension of the VAT cut for this sector or be increases in the employment allowance to reduce the national insurance liability of smaller employers.
    There could also be another car scrappage scheme, similar to the one we had in 2009 help jump-start the economy out of the financial crunch, but weighted heavily towards low-emission vehicles. This could hit the twin objectives of stimulating the economy while lowering emissions from the fleet of vehicles on the road.
    Many of the bounce back loans will never be recovered even if payment terms are extended beyond the current ten years. Under Pay as you Grow PAYG, you can apply for a 6 month Capital Repayment Holiday, up to 3 times during your loan term. During this repayment holiday, you’ll only make interest payments. Iou can also request a single 6 month Capital & interest repayment holiday. You won’t make any payments during this time but interest will continue to accrue.

  • Brad Barrows 3rd Jul '21 - 5:51pm

    I assume Christine Jardine is commenting on the situation in England. The business rates holiday in Scotland was extended to March 31st, 2022, for the retail, leisure, hospitality and aviation sectors.

  • Steve Trevethan 3rd Jul '21 - 6:25pm

    Are the monies referred to above in £ Sterling?
    If so, how big is the problem in paying these monies instead of unemployment monies and the like?
    What might be the anti-magnifier effects of a premature removal of furlough monies and a lack of forbearance on debts, not least rents and mortgage repayments?
    If there is any subsequent inflation might it be possible to manage it through taxation without austerity for the many?
    P.S. Might we learn from Scotland?

  • The situation for our business is that we have to start paying the Bounce Back Loan in September, having used it to pay redundancies; the Furlough Scheme starts being tapered this month and ends at the end of September; 19 of the 26 weeks so far this year have either been the worst or the second worst for work in 14 years (when I started keeping records weekly). The work is not coming back yet: we have three months for the position to change, but if it doesn’t we are probably out of business after 42 years. I’m not blaming the Government – they can’t go on giving away taxpayers’ money for ever – but if we are representative of a lot of small businesses (and I think we are) then the future doesn’t look too bright.

  • Steve Trevethan,

    Russia is having to deal with rising inflation as its economy recovers rapidly from lockdowns with consumption fuelled by credit expansion and savings Interest rates have so far been been raised to 5.5% in an effort to bring the pace of price rises under control and bring the rate of inflation back to 4%.
    “Rising prices, particularly for food, are a political problem for the Kremlin in a country where 20m people — or one in seven — live below the poverty line, and memories of rationing and hyperinflation are less than a generation old.
    Moscow has imposed some price caps on key household products and is considering new export quotas or additional duties on food products if global prices continue to rise, the country’s economy minister told the Financial Times last week.
    President Vladimir Putin said last week that inflation was one of Russia’s “two most urgent problems”, alongside a rise in unemployment since the coronavirus pandemic began.”
    Brazil’s central bank is also having to raise rates to combat rising inflation

  • Peter Martin 4th Jul '21 - 8:15am

    @ Steve @ Joe,

    You can always find, as Joe has just done, somewhere in the world where inflation is higher than here, Covid or no Covid.

    Inflation is a potential problem, however. This is not because of high govt deficit spending per se. If this had been the case we would have already seen high inflation to go with the previous high deficit spending. The deficits themselves are fiscally neutral in the short term. If, for example, you get a tax refund from government and don’t spend it, except perhaps on buying some Premium Bonds, the Govt deficit, and debt, has increased but the effect on the economy is zero.

    The potential problem is too much spending relative to what is available to buy if those who have saved during the pandemic spend too quickly afterwards.

    This is not a decision the government has any direct control over but they do need to be able to react quickly if and when a problem does arise – but not before. It may not arise at all.

    If inflation does present itself as a problem, the other mistake they are likely to make is to raise interest rates rather than raise taxes. This will be applying a monetary solution to a fiscally created problem. The danger will be that they’ll crash the economy rather than slowing it.

  • Peter Martin 4th Jul '21 - 8:45am

    The general assumption seems to be that the worst of the Covid pandemic is over and we can start discussing the details of how we “get back to normal”. How furlough schemes can, or should, be wound down etc etc.

    The Govt, and most politicians of all parties too, seem to be assuming a weakening in the link between deaths, hospitalisations, serious illness and the prevalence of the virus is sufficient for removal of most, if not all, restrictions on the 19th. However, cases rose fivefold last month to about 23k per day. They show no sign of slowing down and so will likely be over 100k per day in a matter of weeks. The increase in deaths will follow a similar, albeit delayed, exponential increase but thankfully will be ‘only’ something like 150 per day in a month or so rather than the 1000 per day we saw at the peak of the last wave.

    But what will follow as we enter the colder months? When will the third wave peak and what will be the levels of death and hospitalisations when it does? Sure, the vaccines work, but they don’t work as well as we need them to right now and neither is the take up rate as high as we need it to be. Will the NHS cope with yet another big wave?

  • Steve Trevethan 4th Jul '21 - 11:28am

    Thanks to Peter M. for his contributions!
    The point about the strategic error of using a monetary solution to “address” a fiscally created problem is delightfully neat.
    Peter M. is correct in pointing out that H.M.G. and those in their cartel, notably the M.S.M. are endangering our fellow citizens and their children .
    The attachment demonstrates this with horrible clarity.
    How many are aware that HMG has returned to its “herd immunity” policy which contributed to the deaths of thousands at the start of this plague?
    Who benefits from this policy?
    Might our leadership speak up about this?

  • Increasing taxes in Russia, Brazil, the USA or elsewhere where inflation has been stoked nullifies spending increases and exacerbates recession. Increasing interest rates will dampen down their inflation.
    To cure stagflation (as occurring in Russia), one must deal with two distinct problems – recession and inflation – using two distinct solutions. The solution for a recession arising from falling demand is deficit spending. During a recession, an economy suffers from a shortage of money.The government’s deficit spending adds money to the economy, curing the stagnation. Deficit spending can be accomplished by temporary tax cuts, increasing discretionary spending, direct subsidies/grants/guarantees etc to firms or households or any combination of such measures. Such temporary stimulus must be tapered away as economic growth is reestablished.

    Then, to cure the inflationary part of stagflation, the government must raise interest rates, thereby increasing the reward for owning money, i.e increasing the value of money.
    Governments that understand these basic economic realities will be able to address the worst economic impacts of the pandemic and retain the support of their electorates.
    In the UK, politicians of all stripes (Conservative, Labour, Liberal Democrat) have enough knowledge and experience of stagflation coupled with sufficient expertise at the treasury, not to make mistakes that would cause a disastrous spike in long-term unemployment at the same time as generating a persistent inflationary spiral.

  • Steve Trevethan 4th Jul '21 - 3:19pm

    Who benefits from inflation?
    Who benefits from austerity?
    Is it the case that the « free market » is not self balancing?
    If governments can manage inflation and stagnation, why do they not prevent them or mitigate them at an early stage?

  • Peter Martin 4th Jul '21 - 3:45pm

    @ Joe,

    I think we would both agree that high levels of government spending relative to the levels of taxation does have the potential to cause excess inflation. If we didn’t think that there’d be no reason to ever raise taxes or cut government spending.

    This being the case, why do you believe it doesn’t work the other way around? ie that backing off with spending and increasing levels of taxation doesn’t have a counter inflationary effect? That this can only be achieved by higher interest rates? The real world evidence is clearly against you. If the post 2010 austerity experience showed anything it was that austerity was effective in reducing inflation to ultra low levels.

    This wasn’t done by increasing interest rates. They have been at near zero levels for over a decade now.

  • Monetary inflation generally refers to an inflation in the broad money supply i.e. principally deposits held at banks. There are two main forces that drive up the broad money supply over time: either banks make more private loans and thus create new deposits or the government runs large fiscal deficits while the central bank creates new bank reserves to buy large portions of the bond issuance associated with those deficits (which increases both broad money and base money). Private bank lending is typically the main source.
    Asset price inflation often happens during periods of high wealth concentration and low interest rates. If a lot of new money is created, but that money gets concentrated in the upper echelons of society, then that money can’t really affect consumer prices too much but instead can lead to speculation and overpriced buying of financial assets. We see this most clearly in property and share prices.
    The monetary inflation after the financial crisis was principally as a result of bank lending into the mortgage market and stock market investments.The public sector deficits from 2008 were reducing year on year and simply offset deleveraging in the private sector. There was no significant increase in money supply directed towards consumption i.e. no significantly increased public sector spending into the economy or above inflation wage increases.
    The money inflation created by banks during the pandemic has also been principally directed at the mortgage and stock markets, but public sector spending has increased significantly as a consequence of health and emergency relief measures resulting in an accumulation of private sector savings.
    As lockdown measures are eased it will be important to target state support to where it is most needed and to roll back the asset price inflation in the housing and stock markets. That can be achieved by directing support on a regional and industry sector basis rather than broad fiscal policy. As the Bank for International settlements notes, normalisation of interest rates over the coming years will also be required to dampen house price inflation and stock market speculation as well as supporting the value of the currency in International markets for imports of food, energy, commodities and manufactured goods. Tax receipts will increase and deficits reduce automatically as the economy recovers.

  • Peter Martin 4th Jul '21 - 7:51pm

    @ Joe

    You might want to think about inflation more in terms of what everyone wants to spend and what is available to buy rather than all this convoluted stuff about so called money supply.

    If we have 100 buyers for 100 loaves we can establish a price for one loaf. But if we have more buyers than loaves the price will have to increase enough for some to drop out. An increased money supply isn’t going to affect the process if it it concentrated in the hands of the wealthiest buyers.

    They won’t want to buy more than one loaf on any case.

  • Nouriel Roubini gained some prominence as one of the few economists that forewarned of the 2008 financial crisis. He has set out the answer to Mr Trevethan’s question above in an article in the Guardian – Conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis
    “central banks have effectively lost their independence because they have been given little choice but to monetise massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. As inflation rises over the next few years, central banks will face a dilemma. If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.
    But even in the second scenario, policymakers would not be able to prevent a debt crisis. While nominal government fixed-rate debt in advanced economies can be partly wiped out by unexpected inflation (as happened in the 1970s), emerging-market debts denominated in foreign currency would not be. Many of these governments would need to default and restructure their debts.
    At the same time, private debts in advanced economies would become unsustainable (as they did after the global financial crisis), and their spreads relative to safer government bonds would spike, triggering a chain reaction of defaults. Highly leveraged corporations and their reckless shadow-bank creditors would be the first to fall, soon followed by indebted households and the banks that financed them.
    To be sure, real long-term borrowing costs may initially fall if inflation rises unexpectedly and central banks are still behind the curve. But, over time, these costs will be pushed up by three factors. First, higher public and private debts will widen sovereign and private interest-rate spreads. Second, rising inflation and deepening uncertainty will drive up inflation risk premia. And, third, a rising misery index – the sum of the inflation and unemployment rate – eventually will demand a “Volcker moment.”
    A recent BIS analysis has suggested that UK interest rates may return to the levels of the 1990s It remains prudent to maintain a close watching brief on inflationary expectations and calibrate policy accordingly.

  • Peter Martin 5th Jul '21 - 10:25am

    @ Joe,

    You’re still not answering the questions:

    1) If excess Govt spending, relative to taxation levels, or a looser fiscal policy, has the potential to be inflationary, why cannot the opposite, a tighter fighter fiscal policy, produce a deflationary effect?

    2) How do you explain that the fall, over the last decade or so, in the rate of inflation has coincided with a fall in interest rates rather than a rise, as your prescription for countering inflation would suggest they should?

    The real world evidence is that inflation has fallen because fiscal policy, rather than monetary policy, has been been very tight. I would suggest too tight, and that the central banks have tried to compensate by reducing interest rates to record lows as we have all seen for ourselves.

  • Peter Martin 5th Jul '21 - 11:07am

    Discussions on the causes of, and remedies for, inflation might be interesting to some but there is the wider issue of what we need to do right now about Covid. It very much looks like Matt Hancock had displeased the Tory right and they decided he had to go. Allowing himself to be photographed having a quick snog in his office didn’t help but it’s beyond belief that CCTV pics would be released in the way they have unless someone at the top had authorised it.

    The Tory right have decided that there is a huge inflation risk to carrying on with sensible precautions which is just a figment of their imaginations. There is no evidence that we can’t carry on a little longer doing the right thing and keeping on with furlough schemes etc. Instead the Govt will allow a huge build up in the Covid infection rate which they hope won’t result in a corresponding number of deaths and hospitalisations.

    It is right wing neoliberal libertarian madness. All the opposition parties should be speaking out much more strongly and supporting the scientific case for not throwing caution to the winds just now.

    “Government scientists have warned Downing Street is in danger of repeating the mistakes of last summer by pressing ahead with plans to remove all coronavirus measures on 19 July.
    Professor Stephen Reicher, from the University of St Andrews and a member of the Sage subcommittee on behavioural science, said he had fears that the level of Covid infections was not low enough to avoid another significant spike. ”

  • Peter Martin,

    The current inflation rate is 2.1%. The CPI index (with 2015 as the base year) was 90.1 in May 2010 and 111 in May 2021 That is an average annual increase of just shy of 2% per year since 2010 (1.9%), as per the BofE target, suggesting that the combined monetary and fiscal stance over the past decade has produced the inflation rate desired by government (with the unemployment rate below 4% before the pandemic). As for the impact of tax rises. VAT increases from January 2011 contributed to pushing up inflation to over 5% during 2011 and depressed real wages as noted by the TUC at the time Subsequent tax cuts in the form of above inflation personal allowance increases and cuts on the top rate of tax from 50% to 45% coincided with big falls in the rate of inflation. So if it is real world evidence you are relying on rather than ideology, the data points in the opposite direction to what you have stated. CPI inflation has been contained largely as a result of global deflationary forces pushing against a lower sterling exchange rate and the fact that QE in the wake of the financial crisis has been largely directed at bank recapitalisation and lending into the mortgage/stock markets i.e. asset price inflation rather than wage uplifts or consumption spending. Lower interest rates have created inflation but principally in house and share prices where the great bulk of new money creation/lending has been directed.
    This thread concerns how and when furlough programs might be wound down as the risk of overwhelming the ability of the NHS to cope with the pandemic recedes. Levels of treasury deficit spending as household spending ramps back up and Bof E policy to regulate lending, contain inflation expectations and maintain the monetary and financial stability that provides the foundations for economic recovery are what Christine Jardine and other LibDem Mps will be responding to. Increases in the tax burden over the next two years before economic recovery has been established and stabilised are not part of that planning.

  • Peter Martin 5th Jul '21 - 2:00pm

    This is the point. Inflation isn’t an issue. Funding the furlough scheme can be afforded a little longer.

    Christine Jardine should be going much further than just talking about furlough. The whole package of measures are important. It’s far too soon to say the risk of overwhelming the NHS is receding.

  • Peter Martin,

    There is an large element of uncertainty round the future direction of interest rates and consumer inflation at present There is no uncertainty around house price inflation. It is exacerbated by zero bound interest rates and a principal source of both inequality and macroeconomic instability.

    Echoing Christine Jardine, Jagjit Chadha, the director of the National Institute of Economic and Social Research, said risks remained from winding down furlough, higher company debt levels incurred during the pandemic, and continuing restrictions. Writing in the Guardian, he said the Treasury and the Bank needed to adopt a flexible approach to maintaining emergency support while risks to the recovery remained.
    “Government and Bank of England policies should be used to support the most efficient and dynamic production of goods and services. Attention must be paid to maintaining the credibility of our institutions to manage inflation risks and the stability of the financial system. But as we face obstacles to the recovery from Covid-19, the Treasury and the central bank must also show flexibility to support our continued fightback from the pandemic.
    Last spring, monetary policy responded well to the initial lockdown with a cut in interest rates from the Bank of England and an increase in the size of the quantitative easing programme. With the recovery in train, it is now time to complete the task of forward guidance and explain better what might happen to the Bank’s base rate and the stock of asset purchases as the economy bounces back. It is simply not enough to focus our attention on small changes in the base rate that may or may not matter. What matters is that financial capital is matched with the most productive prospects at the best global terms.
    Not so long ago, the only thing that seemed to matter was how and when we delivered Brexit, and what that might mean for an economy that had suffered a prolonged period of underinvestment. Now, as we think about how to plot a way out of the Covid crisis, it is precisely those gaps in human and physical capital that we need to nurture to deliver sustainable and balanced growth across the country. It is the biggest problem we face. Can we solve it?”

  • Joe Bourke,

    You asserted, “To cure stagflation (as occurring in Russia), one must deal with two distinct problems – recession and inflation – using two distinct solutions. The solution for a recession arising from falling demand is deficit spending.”

    And “Then, to cure the inflationary part of stagflation, the government must raise interest rates, thereby increasing the reward for owning money, i.e increasing the value of money.”

    It is good to see you recognise that government spending increases demand and so produces economic growth. (But disappointing to discover in later comments that you are such a monetarist.) However, it is strange that you don’t recognise that increasing interest rates deflates the economy. Those people with debt have to spend more on interest payments reducing demand in the economy, those who want to be “rewarded for holding money” increase the amount they save and reduce the amount they spent. These are the deflationary effects on the demand in the economy. However, increasing interest rates also reduces supply of goods in the economy, by making it more expensive to borrow to increase supply.

    It would seem to me that to follow your advice would make stagflation worse. Demand even if it is increased by the government would increase more than supply causing more inflation and little growth.

    According to Investopedia the cure is to increase productivity (They also say, “That is easier said than done”) and once growth in increasing and I suppose unemployment falling then interest rates can be increased to deal with inflation. I believe that the cure used in the past was to increase interest rates, try to reduce the government’s deficit, go into recession, massively increase unemployed and only once inflation is under control pursue economic policies to grow the economy. A solution no liberal should support unless there is no alternative.

    The reason there is stagflation is that the increase in demand and the money supply is not being met by increased production. Therefore the cure has to be either reduce the demand and the money supply or increase production. I suppose that the government should provide money to companies to increase their production and their productivity. The issue then becomes can this be done in such a way that demand is not increased faster than supply can be increased.

  • Joe Bourke,

    Your post at 1.01pm today misrepresents what was happening with the economy. An increase in VAT by 2.5% is always going to increase inflation as most prices will increase by 2.5%. Therefore it is not a good example of counter-inflationary measures, as you should know. It did reduce growth almost to zero so it was a good anti-growth measure (it was deflationary).

    The Coalition government pursued deflationary fiscal policies while the Bank of England did QE. It is therefore not surprising that those modest tax cuts which were not an economic stimulus did not result in huge growth rates or inflation as the economy was not at full production.

  • Michael BG,

    Fiscal stimulus is a temporary measure to stimulate demand in the economy or ‘animal spirits’ as Keynes referred to it. . It is withdrawn as the economy returns close to full capacity.
    Increasing the risk free interest rate to at least the target level of inflation does not reduce aggregate demand. It increases consumer confidence. The reason is one persons spending is another persons income. Nominal incomes from all sources typically rise with inflation across the economy, such that increased interest costs are met by increased nominal incomes. Real incomes do not change in aggregate, but there is a change in the distribution of real incomes. Those reliant on fixed incomes benefit. Pensioners living off savings are able to earn a return closer to the rate of inflation, minimising the declining purchasing power of their money and retirees are able to purchase a higher annuity with their pension savings. Retirees have a high propensity to consume earnings while maintaining capital. Japan’s experience with low interest rates and an aging population has made this clear. When interest on savings is very low, savers will hoard cash. Borrowers face higher nominal costs, but also have higher nominal incomes to meet those costs.
    Bank lending to individuals (predominatly mortgages) accounts for around 60% of bank lendng. Stock market and commercial real estate investments around 30% and
    productive lending – i.e. loans to sectors which contribute to GDP – around 10%.
    Productive investment is a fraction of overall lending in the economy and is driven by demand rather than fractional changes in interest costs. Non-productive lending at very low interest rates is what creates bubbles in the housing and stock markets that ultimately crash when very low interest rates become unsustainable.
    A combination of targeted fiscal stimulus (probably job guarantees) to generate demand for productive investment and employment coupled with increases in interest rates to reign in speculative lending and maintain consumer confidence is the policy approach to tackle stagflation.

  • Michael BG,

    all economic decisions have dual effects. A VAT increase does increase consumer prices (but not food, rents, transport or other zero rated/exempt products and services) and may potentially reduce growth, if not offest by countervailing fiscal or monetary measures. That is also true of other taxes. Increases in corporate taxes may flow through to prices as firms try to maintain returns on capital and share prices. Increases in income taxes and national insurance may generate wage price inflation as workers/self-employed seek to maintain disposable income. Increases in stamp duty may impact on house prices if there is high demand.
    The increase in personal allowance during the coalition was not a modest tax cut. The allowance increased from £6,475 in 2010 to £10,000 by 2015. However, I would agree the net effect of tax cuts versus tax rises was relatively neutral. Taxes as a share of national income remained relatively stable over the parliamentary term, hovering at around 36 per cent of national income.
    UK inflation during the coalition years was recorded as follows:
    2010 3.3%;2011 4.5%; 2012 2.8%; 2013 2.6%; 2014 1.5%. As you may recall the BofE had to write to the Chancellor whenever inflation was 1% over or under the 2% mandate. Growth picked up toward the end of the coalition period as inflation declined and the UK became the fastest growing of the G7 economies from 2013 to 2016 before the Brexit referendum.

  • Peter Martin 5th Jul '21 - 5:56pm

    @ Joe B,

    “Fiscal stimulus is a temporary measure to stimulate demand in the economy or ‘animal spirits’ as Keynes referred to it. . It is withdrawn as the economy returns close to full capacity.”

    Not necessarily. It happens neither in the UK nor the USA.

    If the UK’s trading partners are determined to sell us more than they buy from us, and this happens over an extended period of time, as it has happened in the UK for the last 3 or 4 decades then someone in the UK has to be in permanent deficit.

    This cannot be the private domestic sector, except perhaps for a short period. It has to be mainly the government. They have to be putting the money back into the economy to replenish what leaves to pay our net import bill.

  • Steve Trevethan 5th Jul '21 - 8:55pm

    If, as it seems, inflation is a result of an excess of money and we have a high number of starving children in households who do not have enough money to feed themselves, might the distribution of money be a matter to consider?

    Might excessive inequity of wealth be a factor of inflation?

    What proportion of starving households were advantaged by Q.E?

    Did Q.E. contribute to the inflation in house and stock prices?

  • Joe Bourke,

    A fiscal stimulus should be temporary, but it needs to last as long as the economy is not at full capacity. And this can be years if the stimulus is gentle because it is based on the limits in growth of the economy.

    Any increase in interest rates decreases demand in the economy as I have explained above. If a person’s income increases in line with prices but a person has to pay more interest they will not have enough money to buy the same amount of goods as the previous year because the price of these goods have increased in line with their gross income but not their net income. You seem to be denying that the higher the interest the few people and companies will borrow. When interest rates increase the project which would just make a profit no longer does because of the increase in interest payments.

    While I support job guarantees they are not a solution to stagflation because as you say they increase demand. As I have already explained the problem with stagflation is the increased demand is producing inflation and not more goods in the economy.

    As I wrote earlier a 2.5% increase in VAT increases inflation. I didn’t say that it would increase inflation by 2.5%. (However it will increase transport costs via petrol and maintenance and will increase the price of most services which have VAT on them.) An increase in taxes on incomes does not necessary lead to wage inflation, but workers will be keen to keep their spending power, but many will not be successful.

    When the government’s economic policies nearly got us into a double dip recession this gave more space for economic growth afterwards.

  • Michael BG,
    when the risk free rate is near zero or significantly below the rate of inflation, lowering interest rates does not stimulate consumer demand (as successive rounds of QE have shown), can impede economic growth and generate large wealth inequalities. Returning interest rates to at least the rate of inflation can aid in normalising demand and the savings ratio, improving consumer confidence and addressing in part widening wealth inequality.
    Japan has had near zero interest rates since the early 1990s. As this short article notes
    “Japanese interest rates have been close to zero since the mid-90s, but it has not offered a miracle cure… the truth is, we don’t have enough businesses or the need for investments to borrow the money.”
    So what lessons can the world learn from Japan?
    “Low rates do not boost private demand, private risk-taking or entrepreneurship,”

  • Steve Trevethan,

    If inflation is caused by an excess of money and not enough goods, re-distributing money to the poorest might not help, as demand will increase for more basic items and it will depend if there was a surplus of such goods or if more can be produced quickly to meet the new demand.

    QE makes the rich richer and I assume the poor poorer. It could be used to directly finance government spending some of which could be an increase in benefits for the poorest in society. The problem would then be when QE is no longer needed could the increase in benefits be financed by other means.

    Joe Bourke,

    I didn’t say that lowing interest rates when they are near to zero does stimulate demand. This does not mean that interest rates can be increased without effecting demand as I have stated above. If interests are below the rate of inflation this encourages people not to save and to borrow. I expect this encouragement is greater the bigger the gap. Therefore removing the gap would affect some people’s actions.

    Another lesson from Japan is that monetary policy cannot always successfully manage the economy. So it is a good that there is fiscal policy as well.

  • Michael BG,

    you write above “It is good to see you recognise that government spending increases demand and so produces economic growth” but at the same time do not seem to regognise that increasing spending on interest will increase the disposable income of those in receipt of such income.
    You also write “When interest rates increase the project which would just make a profit no longer does because of the increase in interest payments.”
    Companies cost of capital is determined by the weighted average of the cost of equity (share issues and retained earnings) as well as the risk premia on their borrowings. Generally speaking the higher the level of leverage in a businesses the higher the interest rate it will pay. It the level of leverage that is crucial to interest costs.
    Larger companies generally do not rely on significant bank lending for capital investment. They access the capital markets to raise equity and/or corporate bonds. Hurdle levels for investment projects are based on the mix of returns required by shareholders (dividends and gains)and corporate bondholders rather than bank rates.
    The majority of bank lending (90%) goes into non-productive lending (mortgages on existing housing stock, share buybacks and stock market margin lending).
    If you are able to secure a £150,000 mortgage at 5 times earnings of £30,000 at an interest rate of 3.5% over 25 years, your monthly payment will be £751. If wage inflation increases by 4% your nominal earnings increase £100 per month. If the mortgage rate increases to 4.5% to offset inflation, your monthly payment will be £834 i.e. £83 higher. On the flip side, the interest earnings of savers in the economy will be higher with a greater distribution of income to savers. The borrowers real income will reduce (i.e. principally leveraged property and stock market investors) the savers real income will increase closer to the rate of inflation.
    Relatively small increases in bank base rates over time allow the economy to adjust without the need for any precipitous rise in interest rates from a sudden shock that could initiate a housing and stock market crash.

  • Joe,

    When I talked of demand above, I was referring to aggregate demand and therefore while those people whose main source of income is interest payments on their savings will have more money to spend this is more than off-set by those who have less money.

    The bank rate effects all interest rates charged when raised by the normal means but not those from loan sharks and other such organisations which charge huge interest rates. Therefore my example of a project not being carried out because interest rate increases have eaten all the profit still stands. “When interest rates are rising, both businesses and consumers will cut back on spending” (

    The banks should lend more money to businesses and them not doing so is a major problem for British industry.

    You have forgotten tax and national insurance. Of the £100 a month increase of 4% inflation £32 goes to the government. 1% of £150,000 is £1500 £125 a month, so they are worse off by £57 a month. This I think should be increased by the effects of inflation.

    Are you really saying that increasing interest rates does not deflated the economy?

  • Peter Martin 7th Jul '21 - 11:11am

    “If, as it seems, inflation is a result of an excess of money and we have a high number of starving children in households who do not have enough money to feed themselves, might the distribution of money be a matter to consider? “

    The monetarists have somehow convinced themselves that the quantity of money, or the money supply, determines the rate of inflation. This can’t be true if you think about it. If the Government were to create some money and give it to you and you put it in a piggy bank or safe it would have zero effect on the economy.

    How would anyone know what was locked away behind several inches of steel?

    But if you did choose to spend some or all of it then it would have an effect. So therefore it isn’t the money supply or an “excess of money” which is the problem it is an excess of a willingness to spend which might cause inflation to increase.

    So to help the poor we need to increase their spending power which may, or may not, require someone else’s spending power to be reduced by increasing their taxes.

    We can also decide to reduce inequality by increasing the taxes of the rich. But we’d have to increase it by an extremely large amount to reduce their spending power and have an effect on inflation. If someone has billions then you would need to tax away billions to make that RR unaffordable.

  • Michael BG,

    real world evidence suggests that changes in interest rates have dual effects as Japan’s experience and the dwindling impact of successive rounds of QE have had on aggregate demand.
    The problem for small business is access to finance rather than the cost of tax deductible interest. Banks are reluctant to lend to SME’s for business expansion rather than making less risky secured loans investments on property or stock investments,
    Interest on mortgages reduces as the the principal is repaid. The capital and interest on a £150,000 mortgage over 25 years is £751/month @ 3.5% and £834 @ 4.5% i.e. £83 additional. For buy to let investments there is tax relief on the additional interest payments.
    The effect of increasing interest rates is a matter of degree. As this economist writes Low interest rates are hurting growth
    “The low-, zero-, and negative-interest rate policies pursued by the Federal Reserve and many of the world’s other central banks are based on the assumption that low interest rates stimulate economic growth by boosting investment and consumption. This assumption does not hold in today’s world. Low interest rates are doing little to boost investment and are actually reducing consumer spending by more than enough to offset their meager stimulus to investment.

    The theoretical and econometric models used by the Fed greatly overstate the impact of interest rates on investment spending. Thirty-two years in the private sector have taught me that their impact on investment in plant and equipment by large publicly traded companies is negligible. Ask a business leader if he or she has ever made an investment decision – yeah or nay – that would have been reversed by a two percentage-point move in interest rates, and you’ll get a one-word answer: “Never.”
    Too many years of excessively low interest rates have raised the savings rate of young and middle-aged people saving for retirement and have severely cut the income and spending of old people who had money in the bank. “Normalizing” interest rates won’t hurt economic growth, even in the short run. In fact, if the fear of rising rates gets potential homebuyers off the fence, it could boost growth. Longer-term, economic growth will be stronger if savers can get a decent return. By keeping interest rates too low for too long, the Fed has hurt economic growth. It needs to raise rates much more quickly than markets expect.”
    This is precisely what Japan’s experience with keeping interest rates too low for too long has shown.

  • Joe Bourke,

    I am very concerned that you believe that 1% of £150,000 divided by 12 is £83. I am sure you can see that 1% of £150,000 is £1500 and I can assure you that a twelfth of £1500 is £125.

    You are doing what you often do, which is respond to something that wasn’t written. I don’t think there are many people who will say that near zero interest rates is boosting the economy. I have never said it.

    “Rising or falling interest rates also affect consumer and business psychology” (Investopedia). I would say it also affects confidence. Confidence does affect investment decisions of companies.

    The article by Robert Fry is 4 years old. (He doesn’t seem to have an article in Wikipedia.) Why do you think anyone should agree with his opinion?

    You haven’t answered my question – are you really saying that increasing interest rates does not deflated the economy?

  • Peter Martin 8th Jul '21 - 11:50am

    Joe Bourke,

    It’s fair enough to argue that interest rates are too low. If you think they should be roughly the same as the inflation rate then again there’s nothing wrong with that. So let’s see you make the case for around 2%, or whatever might be your favoured figure, for both. It will mean, though, that if there is another economic crash that the BoE should not be allowed to lower them in an attempt to stimulate the economy. That’s how they have come to be near zero at present. In other words the supposed independence of the central bank will have to be withdrawn. Again I can’t see any problem. You can’t remove something which doesn’t in reality exist to start with.

    I still can’t quite follow what you are advocating. You don’t agree with primarily fiscal regulation, except perhaps in exceptional circumstances, and you don’t agree with the New Keynesian concept of monetary regulation via the variation of interest rates. So who and what do you agree with?

  • When we speak of an output gap in the economy we are referring to the output of real goods and services compared to potential output of physical and human capital available in the economy.
    The equilibrium interest rate is a theoretical rate at which the supply and demand for money is in balance with the output potential of the economy.
    The Federal Reserve Bank of Boston’s President and CEO Eric S. Rosengren makes the point that Years of low interest rates made the current economic crisis worse
    Those mistakes should not be repeated as we come out of Covid lockdown. Ultra loose credit is already igniting another unsustainable housing and stock market bubble. That needs to be gently deflated as we go forward to avoid any sudden need for a dramatic overnight increase in rates.
    Writing in the Financial Times this analyst notes: Low interest rates are the scourge of the poor and vulnerable “All lower interest rates do is make it harder for those who might be able to save a little to get a healthy return that might provide financial resilience today and a secure retirement in the longer term.”
    The US Federal Reserve’s unconventional post-crisis policy, like that of many other central banks, has been founded on an extremely conventional hypothesis: if low rates spur growth, then ultra-low rates, or even negative ones, will make growth happen even faster and stronger.
    But this conventional theory was crafted in the years following the second world war, when the US had a robust middle class with the capacity to borrow when rates dropped and spend their debt on durable consumption with long-term advantages to equality. Put another way, Americans had enough financial security to respond to rate cuts by taking out a bit more debt and spending it on a new car or even a new home, boosting demand, employment and shared prosperity.
    Today, with a hollowed out middle class and far more low-skilled workers without enough resources to move to where new jobs might be, the Fed cannot make low rates stoke sustained growth no matter how hard it tries.”

  • Peter Martin 8th Jul '21 - 3:40pm

    @ Michael BG,

    “……are you really saying that increasing interest rates does not deflate the economy?”

    The more conventional/classical view of mainstream economists which I would expect Joe to subscribe to, is that private sector borrowing is neutral. This is why the EU has no rules on private sector borrowing but lots of rules on what the public sector can and can’t do. They argue that this is because lenders are foregoing access to money they otherwise would have access to in exchange for an interest payment from the borrower. The borrower is transferring interest money to the lender which again is macroeconomically neutral in effect.

    However this ignores reality. Lenders don’t generally cut back their own spending so they can pick up some interest. They are lending out money they don’t want to spend in any case. Borrowers generally borrow because they do want to spend.

    Their next justification would be to say that borrowing and repaying happens at random times. That borrowers don’t get richer from borrowing. In fact they get poorer because they have to repay the principal and the interest. So the randomness cancels out any reflationary or deflationary effect.

    The snag with this argument is that the randomness doesn’t cancel out. New borrowing tends to happen in a surge as rates are reduced. Borrowers are spenders so there is a reflationary effect as rates are lowered but the debt deflation sets in later as debts are repaid. The classical economists are right to point out that borrowing doesn’t make anyone better off in the longer term – with the proviso that real interest rates should generally be positive.

    So rising interest rates will deflate the economy in the short term and reflate it in the longer term if the interest paid out by Government does end up being spent. Falling interest rates will reflate the economy in the short term and deflate it in the longer term as debts have to be repaid.

    Somehow the New Keynesians have convinced themselves that low interest rates are always reflationary and high rates are always deflationary . But quite why they think this I really don’t know. A quick look at the historical rates of inflation and interest rates indicates that it doesn’t work like that at all.

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