Yorkshire Post – Crisis needs a more intelligent response
by Dr. Ros Altmann
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I have been warning for some time that the Government’s emergency economic stimulus programme will not revive the economy and that cutting interest rates from already very low levels will make little or no difference. In fact, such panic measures may make our economic difficulties worse, not better. I stand by those warnings.
When will the Government get a grip? We need a much more carefully thought-out package of measures, targetting policy stimulus directly on areas that have been neglected in the rush to help banks at all costs.
For example, pensioners are the big losers from recent interest rate cuts. The reduction from 5½% to 1½% in just a few months is like reducing the state pension by £8 a week for someone with £10,000 of savings. There are 12 million pensioners and more than half of them have savings, but their income is being cut. That will not boost the economy!
As well as earning less on their hard-earned savings, the Government is also robbing them of pension credit because it refuses to recognise that their savings income is cut. This is an outrage.
Pension Credit means tests do not consider the actual amount people earn on their savings, but look at how much savings they have and then calculate what they ‘assume’ the person earns 10% a year (yes, 10%!) interest. Even after recent rate cuts with many savings accounts paying less than 1% interest, the 10% assumption remains.
This is forcing more and more pensioners into poverty. It MUST change urgently. I call on all MPs to insist that the Government immediately adjusts pension credit payments to reflect the dramatic reduction in interest rates.
We do not yet have a coherent policy framework for tackling the crisis. In fact, cutting rates from current low levels could make the economic outlook worse, not better.
Firstly, it will hurt confidence, since when people see the Government panicking and resorting to desperate measures, they stop spending.
Secondly, monetary policy operates with a lag. The fact that the economy is still weakening does not necessarily demand further rate cuts. If a patient fails to show early signs of recovery, the sensible doctor will either give the medicine time to work, or change the treatment, rather than desperately doubling the dose. An overdose could be worse than no action – it could even prove fatal. The same may apply to rate cuts, however frustrating that might be for policymakers and politicians who want to ‘do something’!
Thirdly, pensioners are spenders, not savers, and any cuts in their savings income will cut their spending too. This ‘stealth tax’ on pensioners will not boost the economy.
Fourthly, cutting rates too sharply is sowing the seeds of a coming inflationary crisis. Printing money may make debts easier to finance, but will damage our longer term prospects significantly. It will be virtually impossible to unwind overly easy monetary policy in time.
So what should we do to help the situation? We need a more intelligent and better-targeted response to this crisis. So far, most of the policies are either not helping or are making things worse.
Firstly, if we want to get loans to businesses, then the Government must do so directly, rather than throwing money at the banks and cutting rates in the hope that something might start to happen. The normal transmission mechanisms are broken because financial institutions are desperately trying to rebuild their margins. They already have so many bad loans on their books and so many assets that are worth little or nothing, they cannot lend as before.
Secondly, why not bring back the 10p tax band? This would help all taxpayers, but especially the lowest earners. Much better to change income tax than VAT. In fact, cutting VAT was a waste of money. It was never going to boost spending, it cost retailers huge amounts in changing their pricing structures and will worsen public indebtedness.
Thirdly, the Government could consider buying houses from people about to be repossessed, which would allow them to stay in their homes, avoid the dislocation of repossession and turn their mortgage payments into rent, which could accrue over time.
At the moment, the economy is still reeling. 2009 will inevitably be a difficult year and policymakers should beware of panicking and forcing through policies that will undermine any longer-term recovery.
I understand the Government wanting to help, but doing the wrong things could be worse than doing nothing and there are far more effective policies that we could pursue. By thinking more clearly and considering the wider effects of this crisis, it might be possible to engineer a recovery more quickly.