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Economy: Quantitative Easing

Volume 740: debated on Monday 12 November 2012


Asked By

To ask Her Majesty’s Government what evidence there is that quantitative easing is working.

My Lords, the Bank of England has estimated that the first round of quantitative easing reduced gilt yields by one percentage point, raised real GDP by around 1.5% to 2%, and increased inflation by around three-quarters to one-and-a-half percentage points. The Bank has also launched the funding for lending scheme to reduce bank funding costs and provide a strong incentive to make loans to companies and households cheaper and more easily available.

My Lords, therefore without QE, the recession would have been even worse. Is the Minister aware that since then, the Governor of the Bank of England said that the MPC would have to “think long and hard” before it restarted QE. The deputy governor said that it would be inappropriate to go on with it because there is no appetite to borrow and invest. On top of that, the chief economist of the Bank of England said recently that the economy is stuttering to start. He said that after knowing all that the Government are now proposing. What else are they going to do?

My Lords, first, since the noble Lord talks about the state of the economy, we should recognise that employment is at a record high; inflation, for which the MPC has responsibility, has come down very significantly; the trade deficit is down; and the economy is growing again. We really do not need too much unreasonable doom and gloom. I could cite many other recent quotes from the Bank of England, which has made its position completely clear. In October 2012, the governor said that the MPC stands,

“ready to inject more money into the economy”.

As, when and if it thinks the assessment is right, it is free and able to do it.

My Lords, what is the Government’s latest estimate of the reduction they have achieved in the deficit since taking office? Is it still a quarter? Will the noble Lord assure the House that that is more than would have been achieved at this point by the previous Government’s deficit reduction strategy, as evidenced by the Office for Budget Responsibility’s pre-Budget forecast in June 2010?

My Lords, we are straying a bit from the effect of quantitative easing and on to the Government’s fiscal policy, for which the Bank of England is not responsible. However, the fiscal deficit that we inherited has been cut by over a quarter. We are on track. As to what would have happened under a Labour Government at this point, the independent research shows that the country would have been left with an additional £200 billion of debt on top of the present Government’s plans.

My Lords, there is an urgent need in British industry for long-term loans for SMEs. The trouble is that our banks are not very good at this. Banks in Germany, France, the Netherlands and Canada are much better. Will the Government seriously consider following their pattern and setting up an investment bank or institution that specialises in providing such loans, perhaps modelled on the German Kreditanstalt für Wiederaufbau?

My Lords, we are putting together a British business bank in order to bring together the various schemes that SMEs and all companies have access to. I entirely agree with my noble friend that this is an ongoing and very serious issue. We will continue to use the strength of the Government’s balance sheet, which is due to the credible deficit reduction plan, to back up schemes such as the infrastructure guarantee scheme, which goes precisely to one part of the demand and need for long-term bank finance. We will, and have already, come forward with schemes, because I completely agree with my noble friend that this is a critical area.

My Lords, could the Minister just clarify his Answer a little? Is he saying that the economy is now on a continuous expansion path of a sustainable nature, and therefore that everybody else—all the experts who say that there are nothing but bad times ahead—is mistaken? Is that the Government’s view?

My Lords, I merely stated that, on the last numbers from the ONS, the economy is growing again. If we bring this back to the subject of the Question—quantitative easing—the Bank of England’s analysis of 23 August is that economic growth would have been lower in the absence of the asset purchases and unemployment would have been higher.

My Lords, the Bank of England accepts that quantitative easing has pushed up the value of equities and other assets, so favouring the 5% of households which own 40% of those assets. Have the Government any plans to recoup any of this windfall gain that has accrued to the wealthy?

My Lords, what the Bank of England has been doing through the quantitative easing programme has been targeted at 2% inflation but it has been completely clear about the other effects of the policy on the economy, GDP, inflation and equity prices—it says that that was a large but uncertain impact, estimated within the range that the right reverend Prelate gave. It is wrong to see that as a one-off windfall. In that case, was it a one-off disastrous fall in asset prices caused by the banking crisis that preceded it? It is difficult to say what was the one-off windfall.

My Lords, the Treasury announced on Friday that it is to take over part of the Bank of England’s profits from the quantitative easing programme to offset the fiscal deficit. What provision is to be made in the national accounts for those funds to be returned when, as the Governor anticipates in his letter to the Chancellor, interest rate differentials are reversed?

My Lords, these were never the profits of the Bank of England, so I am afraid that the noble Lord, Lord Eatwell, has got it wrong. They were always profits that would fall to the Treasury—to the taxpayer. All that has been done by the announcement on Friday is very sensible, prudent cash management to make sure that £11 billion—in total, £35 billion—of taxpayers’ cash is not sitting idle at the Bank of England but is used to pay the Government’s bills. That is prudent cash management.