There is much talk of the need for policy stimulus following the vote for Brexit and the inevitable uncertainty it has unleashed and the potential for recession. Certainly policy stimulus has a role to play. The Bank of England's role in pumping liquidity in the system has been useful, but scope for further cuts in interest rates are fairly limited, with a cut in base rate from 0.5% to 0% likely to have little impact on the pace of economic activity. And it is the same for further quantitative easing which is likely to suffer severely diminished marginal returns. I am much more positive regarding the stimulus from lower sterling. There is plenty of evidence that competitive devaluations still work for advanced economies and I think we can potentially replicate the situation of 1992 when the UK left the European exchange rate mechanism (ERM) and growth boomed.
As regards fiscal stimulus, there is a strengthened case for it, given the risk of a sharp downturn in aggregate demand. And also with respect to increased investment spending given the plunge in government yields, meaning servicing any increased debt is now close to zero, minimising the risk of "crowding out" private sector investment. But the focus on infrastructure spending and hopes not only for boosting demand but also increasing much-needed productivity is weakened by previous government's (both in the UK and overseas such as most notably Japan) track record in picking projects with poor returns. The HS2 project is probably a good example of this given its escalating costs.Furthermore there is always the danger that any increased spending on projects may come at the wrong time in the economic cycle, given one cannot just start a project right away.
I believe there is a stronger case for cutting taxes to a modest degree (without threatening a big increase in the budget deficit given their supply benefits) such as lower corporate taxes, as part of a strategy to boost growth and to reduce uncertainty following the Brexit vote. Uncertainty could be reduced by outlining as quickly as is feasible, the UK's plans for Brexit including not only its relationship with the EU but also its trade strategy with the rest of the world. We need to know what the trade-off between access to the single market and immigration controls will be, if the EU will not offer any special deals. We can clarify the position on existing EU migrants in the UK as well. We can trigger Article 50 in a matter of months. Within our growth strategy, we can follow a policy of lowering of taxes; of unilateral free trade (which I do not think will weaken our bargaining position), loosening planning controls; securing cheaper energy and increasing airport capacity and so on.
I beleive that we should increase rates to a more realistic level. Yes it will raise mortgage payments, but without an increase people are facing a pension black hole and will have to work longer.
ReplyDeleteI beleive that we should increase rates to a more realistic level. Yes it will raise mortgage payments, but without an increase people are facing a pension black hole and will have to work longer.
ReplyDeleteWell there have certainly been many adverse impacts from lower interest rates such as savers being penalised; the sooner rates are normalised the better!
ReplyDeleteWell there have certainly been many adverse impacts from lower interest rates such as savers being penalised; the sooner rates are normalised the better!
ReplyDeleteI think you are a closet Brexiteer! You have not commented on the fundamental weakness of the UK economy which will hammer it in the future. Productivity. The UK is a price competitive economy based on relatively low wages compared to other Northern EU states and North America. It needs a continuously declining exchange rate to stay in the game. The problem is that in a modern economy capital and WIP imports are every bit as important as exports, and this is the advantage of the EU:- we could ride on the back of Northern European productivity in supply chains and provide a geographical advantage to non EU investors for investment, a position we are about the cede to the Republic of Ireland. I never believed in the crash of the economy after the vote, exchange rates and stock markets excepted, but I do think that the UK will resume its 116 year pattern of decline where asset values fall (except property prices) and the currency goes through waves of devaluation.
ReplyDeleteI did comment on the need to boost productivity. And you are partially wrong about as being a low wage poorly performing economy. We will do well especially compared with the eurozone as we have done for quite a time now due to its macro policy constraints and lack of structural reforms. You are very negative about the UK and clearly not proud of your country like a lot of left wingers and remainers. We are very strong in sectors where measuring productivity is hard to measure like financial services. The EU has held us back in many respects with its protectionist sentiment, corruption, nontransparency, inefficiency, etc. So free trade with all our neighbours will boost growth once we recover from any vindictiveness from the French etc!
ReplyDeleteI'm very proud of my country; it was at its most influential when it could drive its values into the EU and turn German and French policy. Now we will resume our position from 1945- 1974 as poodles of the USA. I'm sorry Patrick but you seem to be following Farage myths; are you now going to suggest that we have £350m per week to give to the NHS? And the UK is at the bottom half of the per capita levels of the EU: well behind the Northern EU states of Germany, Scandinavia, Norway , France (yes France). We sit among the likes of Spain, Portugal and Greece. Do not make the English mistake of saying the Eurozone is lagging (granted it is) therefore our relative performance looks better. But compare the UK, not to holiday destinations and ex fascist states, (which the EU did so much to bring to democracy) but to comparable economies; and we are well down.
DeleteAnd you talk about corruption: curious in a period when the US authorities are hammering British banks for fines for market rigging. Are we really proud of a sector which created the big depression of 2008 and has screwed so many pensions and savings by rigging interest rates and market dealing? Include financial corruption in your productivity assessments.
I did comment on the need to boost productivity. And you are partially wrong about as being a low wage poorly performing economy. We will do well especially compared with the eurozone as we have done for quite a time now due to its macro policy constraints and lack of structural reforms. You are very negative about the UK and clearly not proud of your country like a lot of left wingers and remainers. We are very strong in sectors where measuring productivity is hard to measure like financial services. The EU has held us back in many respects with its protectionist sentiment, corruption, nontransparency, inefficiency, etc. So free trade with all our neighbours will boost growth once we recover from any vindictiveness from the French etc!
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