View the article online at http://citywire.co.uk/money/article/a612152
Beyond QE: ways to kickstart the UK economy
With the UK economy stuttering from one piece of bad news to the next, we ask fund managers and economists how else the Bank of England and Treasury can stimulate the ailing economy.
As the UK economy lurches from one round of bad news to the next, markets are preparing for a further round of quantitative easing (QE). But a number of investors say now is the time to consider the alternatives.
Five years since the credit crisis hit and after £325 billion in quantitative easing on top of record government spending, UK GDP contracted by 0.7% in the second quarter of the year, following two quarters of consecutive negative growth.
With interest rates hovering at record lows of 0.5%, some are calling on the Bank of England and Treasury to consider alternatives to quantitative easing and their commitment to austerity in order stimulate the ailing economy.
Thames River Capital Global Bond fund manager Paul Thursby is one fund manager who is calling for a rethink. ‘There has to be a plan B, but the question is how quickly do they go to that plan,’ he said.
He and co-manager Peter Geikie-Cobb argue the government’s focus on austerity is not working because it is predicated on historic trend growth numbers, which do not reflect the reality of a deleveraging economy and the headwinds from the eurozone crisis.
Meanwhile low borrowing rates are irrelevant because ‘the people that want to borrow can’t and the people that banks want to lend to don’t want to borrow’.
‘Two to three per cent growth in a deleveraging economy is not going to happen. They need to halve the pre-2008 trend growth figures,’ Geikie-Cobb said.
He suggests the Treasury steps in to guarantee infrastructure projects in order to stimulate employment, investment and demand, but recognises that the results could take years to feed through to the economy. An option that could have quicker results could be ‘helicopter’ money in the form of tax rebates.
Their view is supported by the National Institute of Economic and Social Research, which suggests that the near £9 billion worth of money that has been set aside by five of the largest of the UK’s banks to cover payouts relating to payment protection insurance mis-selling claims could raise GDP by at least 0.1% after it feeds through to consumers.
Kames High Yield Bond fund manager Philip Milburn also suggests that one-off tax rebates and tweaking income tax rates to lower the bottom and mid range bands. ‘It would therefore be fiscally neutral and the Lib Dems would love it, but the bit it would hurt the most would be middle England, which would outrage the Conservatives,’ Milburn said.
Another unorthodox option to boost consumption could be to change the format of the lottery. ‘You could tweak the lottery so at least 50,000 people are guaranteed to win £1,000 prizes. It is a bit of fun and would give money to people with a greater propensity to spend it. The only problem is the number of tickets people buy is hugely correlated to the size of the jackpot, but you could have one-off weeks where you do this.’
He also echoes calls for greater infrastructure spend. ‘More government infrastructure spending would help. They could get bond market financing. Institutions like us would happily do this if we could get a national investment body or a replacement for Ambac, which oversaw many PFI deals.
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