The Guest Blog

Why Not Buy Up 100% of the UK Debt Market?

Moorad Choudhry|Treasurer, Corporate Banking Division, RBS

The UK economy is in recession. The euro zone remains in crisis. The European Union is the UK’s biggest trading partner. To what extent are euro zone troubles dragging the UK down with them?

London Financial District
Photo: Vulture Labs | Getty Images

Clearly there is an element of UK performance that is being impacted by EU aggro. But Germany is in the EU too, and its export and employment statistics for the last two years have been impressive (to say nothing of its gross domestic productfigures).

We don’t have to ditch Plan A, but we do need to add to it, otherwise we risk another year of zero growth or worse. The UK economy is going nowhere and as long as euro zone break-up remains in the air we have to look at additional steps that we can and should be taking to kick-start the economy.

The knee-jerk reaction beloved of commentators is quantitative easing . The Bank of England didn’t add to QE last week, but then again with Greek election results uncertainty and Spanish bank bailouts it probably wanted to keep its power dry (if holding over 30 percent of UK sovereign debtcan be called keeping one’s powder dry).

But more QE isn’t what is required. In fact if we take the QE solution to its nth degree, why not go the whole hog and just buy up 100 percent of the gilt market? The government’s spending troubles would be over. Zimbabwe, Argentina, Weimar Republic — you had it right all along.

Forgive the slightly facetious comment, but QE simply isn’t the answer here. Youth unemployment is running at over 20 percent and long-term unemployed at over 1 million. In a post-recessionaryenvironment, corporates pay down debt and strengthen balance sheets, but this merely adds to the downward spiral as economic output stops rising, while financing is harder to come in the general risk-averse climate that prevails.

Plan A with benefits would see the government looking more to the supply side and the labor market, and incentivizing small and medium-sized enterprises (SMEs) to create more jobs. This doesn’t necessarily have to cost the exchequer anything, for instance the first step could be to place a freeze on payroll taxes for all new hires for the next (say) 12 months.

Employer national insurance contributions are a material factor in staff hiring plans, so such a move would yield instant results. The lack of labor market measures in this year’s budget was extremely disappointing to observe.

And if one still views QE as a panacea, what about expanding the range of assets that the BoE can purchase? There is precedent of a sort for this; on one occasion in the 19th century the Bank lent directly to corporations during a recession.

And this is not a new suggestion; a number of people have suggested that the Bank purchase commercial bank bonds or mortgage-backed securities , as a means of getting finance directly to the coal face of business. It’s definitely something to be considered, and if Q2 2012 shows negative GDP results, it has to be taken seriously as a policy suggestion.

But monetary policy is not where the government should be looking. It needs to look at the labor market, bring forward already agreed infrastructure projects, and consider other measures that create incentives to generate jobs and kick-start the economy.

In the meantime we have rising inflationand the specter of euro zone break-up to contend with. But we don’t need them to end up in a stagflationary environment, we’re perfectly capable of getting there by ourselves.

Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.

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