Tory MP Redwood brands UK deficit not important

Tory MP Redwood brands UK deficit not important

Quantitative easing means government budget deficits are not a concern, according to John Redwood, chief global strategist at Charles Stanley and  Conservative Party MP for Wokingham.

Mr Redwood was speaking in the context of the UK budget deficit having been officially eradicated this month, due to higher than expected tax receipts.

The Tory MP said he has “not been worried about the deficit for some time”, because the Labour government of Gordon Brown and subsequent Conservative governments have been able to “print money to pay their bills".

Both Brown's Labour government and the opposition parties at the 2010 election focused much of their economic policy campaigning on what they saw as the need to reduce the budget deficit.

This led to a widespread programme of deep cuts to public services under an initiative branded "austerity", which the UK public was told was essential to balance the country's books after the cost of bailing out the banks in the wake of the financial crisis. 

At the same time, the Bank of England began its programme of QE to keep the economy moving.

Traditional economic theory suggests QE has an inflationary impact on the economy. This is because printing more money, which increases the supply of money, makes money cheaper, in the same way increasing the supply of anything should reduce its price.

Money becoming cheaper in practice means interest rates fall, which should push borrowing up, while the incentive to hold onto the cash, instead of trading it for a good or service, is reduced, so the savings rate falls, and that should push spending up, which should be inflationary.

Mr Redwood noted there hasn’t been a noticeable increase in inflation as a result of QE, meaning the predicted downsides of the policy have not happened, and so the policy can be implemented without the need for deficit cuts.

Richard Murphy, a professor at City University, London, said this is an admission by Mr Redwood that the spending cuts implemented since 2010 have not been necessary.

The Bank of England have stated that QE increases inequality in the economy, and that it harms productivity. This is because making money cheaper makes assets more expensive, and the rich have more assets than the poor, while the old have more assets than the young.

John Chatfeild Roberts, a fund manager at Jupiter, said QE is deflationary, not inflationary.

He said the level of savings goes up, not down, even though interest rates have fallen, because young people have to save more of their salary to buy a house that has risen in price because of QE, so consume less.

Meanwhile, people near retirement will find their pension pots worth less than expected because they will mostly be invested in bonds, the yields of which are lower as a result of QE, he said.

This causes older people, and companies with pension schemes to have to save more, and so spend less. The Bank of England highlighted this recently as being bad for productivity.