Maybe monetary policy, rather than austerity, has damaged growth

by Dr. Ros Altmann

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Letter published in Financial Times, 24th October 2012

Sir

In response Chris Giles’ concerns that austerity cannot explain weak UK growth (Comment October 18) Jonathan and Richard Portes (letters, October 23) suggest that austerity has damaged the economy by scaring away the ‘confidence fairy’. I would like to suggest that both growth and confidence may actually have been hampered by monetary, not fiscal measures. To millions of households, Bank of England policies have felt like a tax increase. Ongoing gilt-buying has reduced current and prospective pension incomes in our aging population, while continued ultra-low interest rates and overshooting inflation have reduced savers’ nominal and real incomes. Thus, monetary policy may have inadvertently operated like a tightening of fiscal policy. How can this be? In unconventional times, normal relationships cannot be relied upon. Heavily over-indebted private and public sector borrowers, who benefit from low rates, cannot increase spending, while those without debts, who could spend, feel forced to retrench as their income prospects worsen. Saga Surveys since 2010 have consistently flagged that precautionary consumption cutbacks are the response of the over 50s to falling real incomes. Over 50s represent nearly half of all consumer spending. In the face of the economic evidence, should we not consider the possibility that the extreme monetary policies put in place to try to generate growth have actually had the opposite effect.

Yours faithfully

Dr. Ros Altmann
Director-General, Saga