The Government must cut taxes and instruct the Bank of England to buy bank bonds through quantitative easing to break the UK’s “slow and measly recovery”, Barclays Capital has said.
BarCap’s UK economist Simon Hayes said the Chancellor had fashioned an unnecessary “policy straightjacket” with his fiscal mandate which was suffocating growth.
Breaking his self-imposed rule would not trigger the feared market sell-off, Mr Hayes claimed, but help restore growth and minimise any long-term damage to the economy.
“If the economy is left to recover under its own scant steam, the costs to society – through persistently high youth unemployment, for example – could be just as unacceptable as a failure to achieve a structural rebalancing. However, at present, policymakers seem willing to operate on the view that the worst is behind us.
“The policy straightjacket is binding tightly, and the result is likely to be a slow and measly recovery.” His comments echoed recommendations last week from the International Monetary Fund, which urged the Bank to loosen monetary policy further to rescue the recovery and called on George Osborne to prepare a Plan B later this year if growth continued to underperform.
Mr Hayes said the economy needed a demand stimulus and that fiscal policy could deliver the boost needed without jeopardising the Government’s record low borrowing costs.
“We believe there is scope for a measured fiscal loosening without provoking an adverse reaction from investors. Although some have characterised the UK’s position in financial markets as being on a knife-edge, in reality the bond markets have shown no signs of concern with the UK government’s debt position,” he said.
To stimulate demand, he recommended a temporary cut in VAT or a temporary increase in tax-exempt capital allowances to encourage corporate investment.
“Unlike cuts in income taxes, which can be saved, these measures only cost the government money if they prompt more spending,” he said.
Infrastructure spending “also seems attractive”, he added, as it “carries longer-term benefits for the economy’s supply capacity [and] is also credibly temporary”.
Although long lead times are considered an obstacle, he said there are several “oven-ready” projects, such as the schools programme that could deliver quick returns.
Alongside fiscal measures, he said the Bank should use QE to buy bank bonds rather than gilts, which would “help counteract the upwards pressure on bank funding costs from the euro crisis”.
Buying more gilts would have little effect on growth. It would be “more effective at boosting inflation expectations than at boosting demand”, he said.
telegraph.co.uk
BarCap’s UK economist Simon Hayes said the Chancellor had fashioned an unnecessary “policy straightjacket” with his fiscal mandate which was suffocating growth.
Breaking his self-imposed rule would not trigger the feared market sell-off, Mr Hayes claimed, but help restore growth and minimise any long-term damage to the economy.
“If the economy is left to recover under its own scant steam, the costs to society – through persistently high youth unemployment, for example – could be just as unacceptable as a failure to achieve a structural rebalancing. However, at present, policymakers seem willing to operate on the view that the worst is behind us.
“The policy straightjacket is binding tightly, and the result is likely to be a slow and measly recovery.” His comments echoed recommendations last week from the International Monetary Fund, which urged the Bank to loosen monetary policy further to rescue the recovery and called on George Osborne to prepare a Plan B later this year if growth continued to underperform.
Mr Hayes said the economy needed a demand stimulus and that fiscal policy could deliver the boost needed without jeopardising the Government’s record low borrowing costs.
“We believe there is scope for a measured fiscal loosening without provoking an adverse reaction from investors. Although some have characterised the UK’s position in financial markets as being on a knife-edge, in reality the bond markets have shown no signs of concern with the UK government’s debt position,” he said.
To stimulate demand, he recommended a temporary cut in VAT or a temporary increase in tax-exempt capital allowances to encourage corporate investment.
“Unlike cuts in income taxes, which can be saved, these measures only cost the government money if they prompt more spending,” he said.
Infrastructure spending “also seems attractive”, he added, as it “carries longer-term benefits for the economy’s supply capacity [and] is also credibly temporary”.
Although long lead times are considered an obstacle, he said there are several “oven-ready” projects, such as the schools programme that could deliver quick returns.
Alongside fiscal measures, he said the Bank should use QE to buy bank bonds rather than gilts, which would “help counteract the upwards pressure on bank funding costs from the euro crisis”.
Buying more gilts would have little effect on growth. It would be “more effective at boosting inflation expectations than at boosting demand”, he said.
telegraph.co.uk
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