With this week’s budget, the Chancellor doubled down on a failed economic model. The government will continue cutting spending into the next parliament, and earlier this week, it was revealed that the Treasury has asked most departments to find an extra 6% of savings.
But austerity isn’t working. Having dropped the last government’s fiscal plan, the Office for Budget Responsibility (OBR) now expects that the Chancellor won’t succeed in his new goal of balancing the public finances as soon as possible in the next parliament.
The OBR forecasts that average earnings are projected to still be below the pre-crisis peak by the end of the forecast period in 2022, and the ratio of household debt-to-income is heading back towards its pre-crisis peak.
Public spending cuts mean less money circulating in the economy. Since 2010, the Treasury’s strategy has been to offset this effect by allowing the Bank of England to pump new money into financial markets. Last year, the Chancellor gave the Bank of England the go-ahead to create an additional £70bn through its quantitative easing (QE) programme.
So while the spending squeeze continues to hurt those on moderate and low incomes the most, new money is being created for the financial sector, benefitting the privileged few. And the long-term indicators are still of a slow recovery, from which many people are left out.
QE for financial markets
The Bank of England’s additional £70bn QE programme is intended to inflate asset prices, so it’s hardly surprising that stock markets are reaching new highs every other day.
The FTSE 100 has closed at all-time highs 14 times in the last two months. Since late June last year, when the Bank of England began flexing its monetary muscles, the FTSE 100 is up by over 25%. A similar story can be told for the FTSE 250.
FTSE hitting all-time highs
(These charts show the FTSE 100 and FTSE 250’s rapid rise over the last year)
Of course, because the majority of assets in financial markets are owned by the richest, they stand to gain the most from QE. For example:
- Ratings agency Standard and Poor found the share of net financial wealth (financial assets minus financial liabilities) held by the wealthiest 10% of UK households has increased from 56% in 2006-2008, to 65% in 2012-2014.
- The Bank of England’s own research suggests that the richest 10% of households in Britain had seen the value of their assets increase by up to £322,000.
In the meantime, the UK public has endured the slowest economic recovery on record. And while budgets are being cut, the number of people using food banks is on the rise. Around 30% of the population, equivalent to 19 million people (a rise of 4 million since 2008) are living below the nationally-recognised minimum income standard.
Slowest recovery on record
According to the TUC, 3.2 million households or 7.6 million people are over-indebted (where debt repayments relative to gross income exceed a ratio of 25 per cent). On this basis nearly one in eight of all UK households are currently over-indebted. Likewise, 1.6 million households are in ‘extreme debt’ (paying out more than 40 per cent of their income to creditors).
Wealth gains 2008-2014
Since 2008, those in the bottom 40% of income distribution have seen virtually no increase in their wealth (in fact their wealth has fallen), while those in the top 20% have seen their wealth increase by nearly 20%.
We need money for people, not financial markets
Listen to Fran Boait, director of Positive Money, discussing the budget on talk radio:
(Click the part 8:00-8:30; the interview starts at 17:35 min)
The fact that the Treasury is cutting spending due to a lack of money, while the Bank of England is actively ballooning up stock market prices with newly-created money, suggests that monetary and fiscal policy need a serious rethink.
That’s why dozens of leading economists have signed our joint letter to the Chancellor, which argues that new money could be used to fund essential investment in infrastructure projects – or a tax cut or “citizens’ dividend”, with the aim of boosting the incomes of businesses and households.
This solution would ensure that the money created through QE is used more productively, for the majority of people. It would help the Treasury with its finances, while limiting the negative effects of QE – hitting two birds with one stone.
You can learn more about these proposals by clicking here.