Letter to the Chancellor

Dear Chancellor,

In the wake of the recent Brexit vote, the outlook for the UK economy is more uncertain than at any time since 2008. Mark Carney has promised that the Bank of England will do “whatever it takes” to support growth. But with interest rates already at historic lows, and questions being raised over the viability of additional quantitative easing (QE), it is unclear that the Bank has the necessary tools to meet the challenges ahead. The new government’s promised economic policy “reset” should involve a new collaborative relationship with the Bank of England, whereby the Treasury supports the design of alternative monetary policy tools.

The Monetary Policy Committee has cut base rates to an unprecedented 0.25% and expanded its QE  programme by a further £70 billion, bringing the total to £445 billion.

However, the past seven years of easier monetary policy has not yielded its desired effects. It’s often forgotten that before 2009, interest rates had never fallen below 2%. Since then they have not increased above 0.5%. Any further cuts in interest rates will not benefit the UK’s economy.

Similarly, the expansion of the Bank of England’s QE programme is the wrong solution for today’s economic problems. QE was arguably required in 2009 to provide the banking sector with liquidity in the face of a frozen interbank lending market. The risks facing our economy have little to do with the availability of liquidity in the financial sector, and all to do with businesses and households cutting spending due to an increasingly uncertain economic outlook.

As well as being of limited effectiveness, ultra-loose monetary policy has come with harmful side-effects. Indeed, both Prime Minister Theresa May and former Chancellor George Osborne recognise that lower interest rates and QE have increased inequality by inflating asset prices. Moreover, the success of both of these policies is dependent on the private sector taking on even more debt. These policies are being implemented despite the Bank of England itself identifying household debt as one of the most significant risks to our economy. Responding to a potential recession by risking financial stability with more private debt hardly seems like a viable policy solution.

As the new government looks to ‘reset’ economic policy, new ways of conducting monetary policy should be considered. Instead of policies designed to fuel asset price bubbles and increase household debt, the Treasury and the Bank of England should co-operate to directly stimulate aggregate demand in the real economy.

A fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects – boosting the incomes of businesses and households, potentially assisting the UK’s green economic transition, and increasing the public sector’s productive assets in the process. Alternatively, the money could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.

In any of these policy scenarios, new money will be directly introduced into the real economy, directly stimulating aggregate demand and boosting employment, investment, and spending. While it is a job for the Treasury to set up the framework for these policies to be deployed, it would remain a decision for the Monetary Policy Committee as to the timing and size of any future stimulus.

After seven years of ineffective unorthodox monetary policy – which has created risks and adverse side effects – we urge the new government to consider alternative policy approaches which will directly increase spending and investment in the real economy without burdening households with yet more debt.

Yours sincerely,

Andrew Watt, Macroeconomic Policy Institute, Hans-Böckler-Foundation

Avner Offer, University of Oxford

Biagio Bossone, Chairman of the Group of Lecce

Christian Marazzi, University of Applied Sciences and Arts of Southern Switzerland

Constantin Gurdgiev, Trinity College Dublin

David Boyle, Radix

David Graeber, London School of Economics

Ellen Brown, Pubic Banking Institute

Eric Lonergan, Economist & Writer

Fran Boait, Positive Money

Fulvio Corsi, City University of London

Guy Standing, School of Oriental and African Studies, University of London

Helge Peukert, University of Erfurt

Herman Daly, University of Maryland

Iqbal Asaria, CASS Business School

Jason Hickel, London School of Economics

Jem Bendell, University of Cumbria

Jeremy Beckwith, Economist & Investment Professional

John Weeks, School of Oriental and African Studies, University of London

Johnna Montgomerie, Goldsmiths University

Joseph Huber, Martin Luther University of Halle-Wittenberg

Josh Ryan-Collins, New Economics Foundation

Kaoru Yamaguchi, Doshisha Business School

Kees van der Pijl, University of Sussex

Ladislau Dowbor, Pontifical Catholic University

Laurence, Seidman, University of Delaware

Luca Ciarrocca, macroeconomic author

Livio Di Matteo, Lakehead University

Mark Blyth, Brown University

Mary Mellor, University of Northumbria

Matthias Kroll, World Futures Council

Nigel Dodd, London School of Economics

Ole Bjerg, Copenhagen Business School

Philip Haynes, University of Brighton

Lord Robert Skidelsky, Warwick University

Steve Keen, Kingston University

Thomas Fazi, Social Europe

Tim Jackson, University of Surrey

Victoria Chick, University College London