It is really bewildering how far the Tories continue to push supply-side economics, and are now preparing to do so yet again even though every such initiative has failed miserably, but deliberately ignore the open goal of demand-side economics. Osborne softened the Vickers bank reform package as a quid pro quo for the banks increasing their lending to industry under the auspices of Operation Merlin. The banks took the weaker reform package bait, but then disregarded the higher lending. Then Osborne offered Funding for Lending to the banks, but what did the banks do? They once again thwarted the intention to release funds for industry by opting instead to use the funds for mortgages and property development because bricks and mortar were a safer loan. So now the latest intention is to lend direct to industry by pulling together in a single bank the plethora of small business assistance provided by government through various departments. Two problems here, however. Total quantum of funding is not increased and, above all, the level of aggregate demand is not increased, which is the whole secret to re-igniting growth. The Tories continue to bark up the wrong tree, and are not much good even at doing that.
So what else is there in this new so-called growth package? The idea that loosening the planning laws – or criminalising house squatting, another irrelevance announced last week – is going to spark a house-building renaissance is pure moonshine. Nor will providing £10bn to underwrite construction of new homes – another element in this over-leaked but under-performing package – unleash a new building boom when what is holding it back is not lack of funding but poverty of demand because potential buyers can’t get mortgages they can afford or the cost of housing is too high as incomes shrink.
What is so startling is that the Tories seem blind to the obvious real solution. When money is now cheaper to obtain in the markets than at any time in the last 300 years and when funds can be borrowed at negative real interest rates, £30bn could be raised for as little interest charge as £150m a year (some 2.3% below the rate of inflation, i.e. the markets are paying you to take the money!), and then through a Special Purpose Vehicle the funding could be allocated across the economy to invest directly in whatever the government prioritised. That could create a million or more jobs within 2 years, massively enhance infrastructure and house-building, and achieve the magic objective of kickstarting real growth. So why don’t they do it?