The 'magic money tree' now officially exists

The British government can now borrow money at negative interest rates.  This extraordinary turn of events was discussed in a BBC radio interview this morning. (You can listen to the whole interview here, beginning at 22 minutes 40 seconds.)

The presenter began by saying, “The world of borrowing went a bit weird yesterday, when investors said they were prepared to pay the UK government to lend money to it.” He went on to ask Richard Dunbar of Aberdeen Asset Management, “Do these low, indeed negative interest rates, mean that the government can afford to go on a bit of a borrowing and spending binge?”

Mr. Dunbar replied, “There is a feeling among investors that it is now time for governments to put their shoulder to the wheel in terms of fiscal policy, either by cutting taxes or by spending on the likes of infrastructure…If you can borrow at nothing, or even less than nothing, that’s a pretty good environment to do so.” He also added that this particularly applied to the UK.

Think about Britain at the moment – we have a housing crisis, the NHS is grinding to a halt, social care is crumbling, and more and more families are struggling to simply put food on the table. This is all the result of years of austerity, years when Britain, a relatively rich country, has behaved, and increasingly felt for many people, like a poor country. The amount of avoidable human suffering caused by austerity is unquantifiable. Some can be seen all too clearly at foodbanks and homeless shelters, but perhaps even more is hidden behind the front doors of disabled people who have lost their social care, and the mothers going hungry to feed their children.

The whole argument for austerity and slashing public spending depended upon the idea that public borrowing was to be avoided at all costs. Those who opposed austerity were frequently told there was 'no magic money tree’, but the ability to 'borrow at nothing, or even less than nothing' comes pretty close, and the need for public spending to boost the economy is now widely acknowledged and called for. 

Despite this ready availablity of money which could be spent on socially useful projects in the real economy, the policy of pumping money into the financial system via Quantitative Easing (QE) continues. This policy has been shown to make the richest even richer, but to do comparatively little to boost economic activity. As the BBC's Jonty Bloom points out, "This is the liquidity trap, the more the Bank of England tries to pump money or liquidity into the economy, the more investors want to put it somewhere safe, boring and unproductive." Surely money created by QE could be spent by the government in the real economy, where it will circulate and benefit the wider population?

Given the problems facing the people of Britain, if the government does not now seize this opportunity, and embark on a huge programme of investment, it will be tragically irresponsible. Take housing as just one example. The government could provide the money to build social housing, which would create a national asset for the future. Decently paid jobs would be created, and those workers would pay tax and National Insurance. Much needed money would flow into local economies. The Housing Benefit bill would be reduced. Children in decent homes would have improved life chances.. the gains to the public purse and to society of building social housing are so numerous that failing to do so would be ideological perversity.

The government should now spend as much money as is needed to repair the fabric of society, which has been so ravaged by years of austerity. There seems to be no good financial or economic reason not to do so.

This blog has been amended to take into account comments made by Alan Wheatley and George Faulkner, for which many thanks.

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© Bernadette Meaden has written about political, religious and social issues for some years, and is strongly influenced by Christian Socialism, liberation theology and the Catholic Worker movement. She is an Ekklesia associate and regular contributor. You can follow her on Twitter: @BernaMeaden