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Plan B: Lend directly to small businesses

Dear Chancellor,

I hope that your advisers have assured you of two fundamental truths. First, there is no chance that the UK economy will double-dip and slip back into recession. The heavily ironic reason for this is that the 2008-2009 recession hasn't finished yet. Output is still 4 per cent below the early 2008 peak and the levels of all the important economic indicators are similarly depressed, just as new drags are coming as a result of the euro crisis.

Second, therefore, economic policy must be framed in the context of a unique, post-1945 predicament that we share with all our leading trade partners. We are in a classic deleveraging era, in which the debt burdens of the household, banking and government sectors have to decline. As the private sector is unable to lend and spend sufficiently to keep the economy moving forward, the government and the Bank of England must try to do so. With fiscal credibility earned, the litmus test of the government's economic strategy now needs to include employment generation and income formation, as suggested in others' letters here. Your creditors will expect nothing less if the debt-reduction strategy is to succeed.

Such policies will work even better follow-ing the Bank of England's decision to restart quantitative easing (QE). As you know, QE is about printing money, as the Bank buys assets and expands its balance sheet, while the private sector and the government try to shrink their balance sheets.
The Bank reckons that its first venture (£200bn of gilt purchases) raised GDP by between 1.5 and 2 per cent and lifted inflation by between 0.75 and 1.25 per cent. But remember that this occurred while the global economic stimulus programmes allowed us all to bungee-jump off the edge of an abyss. Now, QE may gain far less traction.

This time, the Bank might have to be bolder. The recent decision to spend another £75bn on gilt purchases will help to sustain low yields and allow households to refinance mortgages. You should, however, encourage the Bank to consider increasing QE if need be, as last time, and to be more adventurous. The precise remit of the Bank is less important nowadays than the task of easing private-sector credit conditions and stimulating lending to small and medium-sized enterprises (SMEs) and creditworthy households. You referred to this in your conference speech in Manchester, but the Bank can implement this "credit easing" faster and more effectively than the Treasury. It could purchase and package banks' SME loans for sale to investors, purchase bank bonds to ease funding (and therefore lending) constraints, and buy mortgages, the real deadweight on bank lending and household spending.

Ultimately, the Bank could get involved in direct lending to SMEs and to the government, so that the latter could fund infrastructure and other programmes to boost employment. Extra­ordinary times call for comparable economic thinking. We are a long way from having to worry about inflation and, as things stand, the status quo on policy is leading us into a depression that will sink your medium-term fiscal and economic strategy, to say nothing of the disastrous social consequences.

George Magnus is senior economic adviser to UBS Investment Bank. The Telegraph has described him as "the man who predicted the sub-prime crisis would lead to recession"

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This article first appeared in the 17 October 2011 issue of the New Statesman, This is plan B

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide