It’s an election year. Politicians are giving us a barrage of policies. But we often forget to ask the most important question: will they actually work? In this column Sam Fowles take policies on their own terms and asks whether they solve the problem they’re supposed to solve.
When they’re not getting milkshakes poured on them, Reform UK (Ltd) want people to think they’re a real party of government, not just a millionaire’s vanity project. They’ve promised to “slash government waste” in their first hundred days.
What’s the Plan?
Reform identifies five areas of “waste” to “slash”: (1) Stop paying interest on QE reserves, (2) cut £5 from every £100 of government spending, (3) scrap “unnecessary” quangos and commissions, (4) cut “unnecessary” regulations, and (5) cut foreign aid by 50 per cent.
Reasons to Get Excited
Ironically, the plan to stop paying interest on QE originated at the New Economics Foundation, a left-wing think tank. Commercial banks hold accounts with the Bank of England. They use the reserves in these to settle payments between customers. The Bank of England pays commercial banks interest at the base rate on the funds they deposit. These accounts also hold funds from quantitative easing. So, in effect, the Bank pays interest on funds that it gave to banks. This has been described as a “stealth subsidy”.
But these accounts also provide essential liquidity to the commercial banking sector. If the Bank stops paying interest, banks will no longer have an incentive to keep these funds liquid. Forcing banks to maintain their deposits will encourage riskier practices to make up for the money they are losing, putting consumer deposits at risk. While there may be a case for reducing interest over time, eliminating it in one fell swoop will likely cause a liquidity crisis. The major victims will be consumers, who may not be able to access funds in their accounts.
Does it Add Up?
No. Cutting £5 in every £100 amounts to a cut of around £57bn per year. That’s more than the entire military budget. When essential services are already starved of funds, it will likely cripple the public sector. Quangos play an essential economic and social role by depoliticising certain public decisions. Abolishing them either means someone else picking up the slack or subjecting the market to more regulatory uncertainty. Scrapping regulations which align the UK with the EU will add additional bureaucracy for everyone who wants to trade goods and services with EU states. Reform only identifies India and China as targets for its cuts to foreign aid. “Aid” to China amounts to about £900,000 per year. To India, it’s £2.3bn. It’s not clear where the rest will come from or whether Reform will abolish the programmes which encourage trade and investment between the UK and potentially lucrative markets in the Global South (which are classed as “aid”).
Cause for Concern
Reform’s plan is driven by a classic economic delusion: “We make savings in business and at home” says their website “the public sector must be no exception”. But a £2.27 trillion national economy isn’t the same as a household budget. Government must create the conditions for business and society to flourish. Cutting jamborees end up wasting more public money. Gutting the institutions that provide economic stability and making thousands of public sector workers unemployed sucks demand out of the economy. Without demand, business doesn’t invest. The economy becomes less robust and unable to respond to shocks. The ensuing stagnation suppresses both wages and tax revenues. David Cameron’s austerity programme created a “low growth, low wage, economy”, ultimately adding to the deficit it was supposed to cut. The economy still hasn’t recovered. Farage and co propose to double down on a failed policy. Combining more austerity with a liquidity crisis is economic madness.
Scores on the Doors
Electoral appeal: 3/5
Value for money: 0/5
Effectiveness: 0/5
Originality: 0/5
Overall: 3/20
VERDICT: A recipe for recession.
Sam Fowles is a barrister