Title

Jim Brooks considers the current state of the economy, the options for improving it, and what it all means for local authorities. The total now committed to ‘quantitative easing' – or pumping cash into the UK economy – is £175bn, or close to 15% of gross domestic product (GDP). Every man, woman and child in the UK now has a mortgage of £3,000 invested in this strategy of encouraging the banks to act like banks again. The Bank of England's Plan A was to slash interest rates. With these now standing at 0.5%, we are at the end of that option, and money is virtually free. Plan B was ‘quantitative easing'. The question now is, are we ‘upping the dosage' as the next logical stage of Plan B, or is it because Plan A has failed and there is no Plan C? One signal of recovery has been that some of those banks less caught up in the scandal of bundling asset-back financial loans have paid out management bonuses, almost as if things were getting back to normal. If we need to learn one thing from this experience, it is that corporate governance, corporate risk and corporate responsibility can be distorted by the promise of personal gain for bank executives based on short-term bank profits. Unemployment levels are now more than 7%, with the total workforce shrinking below 30 million people. Interest rates are at a 300-year low. Inflation is low, and falling, with little sign of change in an upward direction. And retail spending is also showing little signs of recovery. Other indications are mixed. The notion that either low inflation or a modest dose of deflation is a bad thing for the economy is difficult to sustain. If what we currently have is neither significant inflation nor deflation, could that be expressed as just having ‘flation'? The housing market is showing some signs of recovery. The fall in house prices over the last year is serious, but in terms of the surge in prices over the preceding decade, could be seen as a relatively minor market adjustment. The biggest components in the outlook for the housing market are the availability of mortgages and the shortage of supply of houses. Mortgage repossessions are lower than originally feared, but at least 60,000 families may lose their homes this year alone. The shortage of affordable housing will continue to affect the housing market – preventing people getting on to the housing ladder – and will affect the economy as a whole in terms of what we used to call the mobility of labour. Generally, things will take time to get back to the stability enjoyed from the mid-1990s, when low inflation, low interest rates and steady growth combined to produce a feel-good factor in the UK economy. A recovery can be expected, but the innate stability of the previous decade may not easily be replicated. Plan C appears to be to increase the commitment to quantitative easing. The worrying thing about this is that there appears to be no alternative strategy, even under consideration. For local authorities, the financial situation looks bleak. Grant settlements will remain low for years to come, and this will mean cuts in spending as well as high increases in council tax. Councils will need to deal with increased demand for their services as the economic situation continues to have adverse effects on local communities. Economic regeneration schemes will remain on hold for some time to come, and the opportunities to use planning obligations to support local infrastructure will be very limited. For smaller shire districts, in particular, the options are stark and the options are very limited. Essentially, the Government has invested all its future financial capacity – and more – into the salvation, or salvaging, of the economy. From now on, local government must take its turn in a long queue of competing demands on a smaller pot of money. For local government staff, pay rises will continue to be low, job opportunities restricted, and the pension scheme – traditionally regarded as compensating for lower pay levels – is under severe threat. The treatment applied to combat the recession is severe, and will create collateral damage in some sections of the economy. This may be the only solution, but I'm reminded of a Dakota American Indian saying: ‘If you find yourself riding a dead horse, the first thing to do is to dismount' Jim Brooks is executive director at Sector Treasury Services

Title

Upping the dosage of quantitative easing

SUBSCRIBE TO CONTINUE READING