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Bank Scandal Has Silver Lining for UK

Norma Cohen, Sharlene Goff and Lucy Warwick-Ching
Tuesday, 7 Aug 2012 | 2:27 AM ET

Refunds of mis-sold payment protection insurance are doing more to boost Britain’s stuttering economy than government initiatives to stimulate growth, official and bank data show.

London Financial District
Photo: Vulture Labs | Getty Images
London Financial District

The UK’s five biggest banks have set aside almost 9 billion pounds ($14.03 billion) to cover claims for selling their customers loan insurance that was either not needed or could not be used, in one of the most costly consumer scandals on record.

About 4.8 billion pounds had already been paid out by the end of May—effectively acting as “helicopter money” dropped into the hands of those people who may be among the most likely to spend it.

“When I heard I was going to get over 2,000 pounds in compensation I hired builders to fix a long-overdue problem with the eaves in my roof and put the rest of the money towards a holiday to Greecein September,” said Elaine Overten, a retired nurse from Derbyshire, who received compensation for PPI payments made on her NatWest mortgage over 10 years.

Jonathan Portes, director of the National Institute for Economic and Social Research, said the refunds had the same economic effect as a tax cut.

“If what you are trying to do is to increase demand, the obvious thing is to cut taxes or increase spending,” he said.

Simon Kirby, a senior research fellow at the institute, said that in a healthy economy, injecting expenditure equal to 1 percent of gross domestic product (GDP) —roughly 15 billion pounds, or the worst-case estimate for total PPI compensation—in a single year, could increase GDP itself by 0.7 percent. That effect was likely to be even bigger in a recession , he added.

The government’s own schemes to stimulate demand, meanwhile, have yet to have any demonstrable effect.

When the independent Office for Budget Responsibilityrevised its 2012 growth forecast in March from that of November, it assumed the PPI payouts would boost inflation-adjusted household incomes, but made no upward revision to take account of various government initiatives.

Among these are a widely touted scheme, aired last November, aimed at getting pension funds to invest up to 20 billion pounds in domestic infrastructure projects. It now has a more modest goal of creating a 2 billion pounds fund to begin seeking investments early in 2013.

Other initiatives include guarantees to banks to lend to small businesses at reduced rates, but there is no clear data on how much lending has been generated.

The focus on the effects of PPI refunds comes as ministers face pressure to invest in the nation’s economy in a way the private sector is apparently not willing to do.

Mr. Portes has been among a group of economists urging the government to engage in stimulus, preferably through investment spending on projects including housing and transport infrastructure.

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