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.
Mr Chatfield Roberts added QE is deflationary because the low interest rates mean more companies are able to pay the interest on their debt, and so not go out of business.
It leads to an oversupply of goods and services in the world, so companies cannot put their prices up, and so have little incentive to increase production or invest in new machinery as the price they receive for the goods will not be attractive enough to justify the risk.
Such a lack of pricing power at companies means they won’t put wages up, but the fact more companies stay in business than would do in a normal economic cycle means more workers stay in jobs, so the unemployment rate is low, even as wages don’t rise.
Mr Redwood argued instead of focusing on the UK deficit the government should concentrate on the current account deficit - the difference between the amount the UK receives from exporting to other countries and the amount it pays out for imports.
This deficit has been funded by the UK selling assets such as property, but also shares, to overseas investors.
Bank of England governor Mark Carney has described this situation as “relying on the kindness of strangers”.
Mr Redwood said: “It is high by world standards, and means we gradually get into more debt or sell more assets to keep up with it.”
Mr Redwood is an advocate of the UK leaving the EU, and said this will contribute to a reduction of the current account deficit.
David.Thorpe@ft.com
