New Government: What Next?

The Conservatives are in office for another five years with a long term plan to deliver a prosperous and more balanced economy. But with the mounting burden of household debt set to grow even further, we could be in for a bumpy ride.

Much of the post-election analysis has pointed towards the Tories’ handling of the economy as a key factor in the party’s unexpected success at the ballot box. It is undoubtedly true that GDP growth has appeared healthier in the last 2 ½ years and that headline unemployment figures are falling. For many voters it will have seemed prudent to follow David Cameron’s mantra and “stick with the plan that’s working”.

Despite the upturn in economic confidence, not everyone shares the Prime Minister’s optimism. We’ve written before about how the headline economic indicators obscure a more complex picture. For millions of people, the recovery has barely been noticeable as their living standards have remained stagnant. Productivity growth has been ‘non-existent’ throughout George Osborne’s time as Chancellor and real incomes have been falling for the last six years.

We are experiencing a recovery that is heavily dependent on a sharp rise in the level of household debt. The Office for Budget Responsibility has forecasted that the ratio of household debt to income will soon surpass its pre-crisis level. Mortgage lending is rising, and consumer borrowing is surging by over £1bn per month. PwC projects that unsecured borrowing will grow over the next two years between four per cent and six per cent annually.

There is little indication that the new government intends to depart from its current strategy. Interest rates look set to remain low for many months, and the introduction and expansion of schemes like Funding for Lending, Help to Buy and Right to Buy will all increase borrowing even further.

For many households, the outlook is bleak as they’ll have to fork out an increasing proportion of their incomes on servicing their debts. As several members of the Treasury Select Committee have warned, interest payments might be just about manageable while interest rates are at rock-bottom, but even a small rise could make their payments unaffordable.

The new government will only be able to bring about a sustainable recovery if it finds a way for the level of household debt to start falling. As Positive Money has long argued, this is simply not possible in a system where the supply of money depends on increasing bank lending, the large part of which goes towards the property market. One way to deleverage households on a significant scale is for money to be created by the Bank of England, free of debt, and spent directly into the real economy – so called Sovereign Money Creation. That new money would boost the real economy and allow households and families to start paying down some of their own debts.

Despite the sustained period of abnormal monetary policy since the crisis, the role of money and credit has been largely ignored by parliament in recent years. Attempts to analyse the causes of the financial crisis have overlooked the role of money within banking. There’s little sign that the new government will embark on wholesale reform of the kind that Positive Money is proposing, but we are hopeful that the growing calls for a different approach to monetary policy will mean that parliament looks with renewed interest at the options.

At the end of the back bench debate on Money Creation and Society last year, Zac Goldsmith called for the establishment of a Money Commission.

“I want to put on the record my support for the establishment of a meaningful monetary commission or some equivalent in which we can examine the pros and cons of shifting from a fractional reserve banking system to something closer to a full reserve banking system.”

This campaign for a Monetary Commission will be a focus of Positive Money’s work during the coming parliament. We believe that we can build a strong consensus around the need for greater scrutiny of how money and credit is created. The Conservatives have pledged to rebalance the economy and deliver long-term security and prosperity. Their ability to do so will be severely constrained while the power to shape the economy lies in the hands of money-creating banks.