Support 100 years of independent journalism.

  1. Economy
20 July 2021

Why Boris Johnson’s “levelling up“ agenda remains an empty slogan

In his speech on the UK’s regional divides, Johnson failed to mention the biggest policy exacerbating inequality: quantitative easing. 

By James Meadway

The Prime Minister’s much-trailed “levelling up” speech on 15 July has been widely mocked for its lack of content. Beneath the Johnson-esque flourishes, however, the government’s plans are starting to take shape. Critically, this includes the devolution of further powers to England outside of London and the major cities, with the PM promising “counties” their own metro mayor-style devolution deals in the future.

This is a bigger promise than the rather vague ones the Prime Minister has previously made, but comes after the long-awaited English devolution white paper was repeatedly delayed and then abandoned, and the resignation of devolution’s government champion, Simon Clarke, in September last year. With Johnson admitting his was only a “skeleton” of a plan, new spending commitments are once again deferred until the spending review, expected in early October – and assuming that a Covid surge doesn’t, once again, trample all over No 10’s blueprints.

It’s the impact of coronavirus that was the most obvious omission of the speech. Johnson pulled out a list of stats on regional inequalities that will be familiar to many of us, and even managed to acknowledge the role of Westminster, governed by Tories for a decade, in skewing funding towards areas already enjoying economic success. But the long-term impact of coronavirus was scarcely acknowledged.

If continued restrictions are necessary in important parts of the economy – whether imposed in a panic by government, imposed “from below” by behavioural changes, or (as is likely) some combination of both – a recovery to a pre-Covid “normal” will not happen. The absence of this rebound won’t just hinder overall growth, which is likely to remain suppressed in the longer term as Covid-19 drags on for many years. It means that the way in which activities across the economy are performed, particularly where face-to-face contact is important, will need to change. Management consultants McKinsey have estimated that 107 million workers will need to find a new occupation over the next decade, as a result of Covid and automation; such transitions are heavily concentrated in high street staples like retail and hospitality.

[See also: Why the window of opportunity for social democracy is closing]

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s global affairs newsletter, every Monday and Friday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A weekly dig into the New Statesman’s archive of over 100 years of stellar and influential journalism, sent each Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.
I consent to New Statesman Media Group collecting my details provided via this form in accordance with the Privacy Policy

The failure to include any analysis of Covid’s ongoing economic impact undermines whatever vague aspirations Johnson is using to bolster his “levelling up” slogan. But the single policy most significantly worsening wealth inequality in the UK today – between and within regions – is the £875bn quantitative easing (QE) programme. After 12 years of QE, all sides accept that it has driven up asset prices – which automatically benefits those who hold lots of assets more than those who hold few or none: wealthy property owners do better from QE than those renting from them.

Despite some unconvincing work by the Bank of England to wave away this effect, last week, the House of Lords Economic Affairs Select Committee, reporting on QE, highlighted the inequality impacts of the programme. Covid, as with so much else, has exacerbated the problem, with the £450bn expansion of the scheme since last March further bending our economy out of shape. Resolution Foundation analysis shows that since the start of the crisis, the richest 10 per cent of families have accrued £44,000 on average from higher asset prices, while the poorest 30 per cent have gained £4.

Yet the political class have remained silent about this. QE’s inequality impacts bubbled up into the political mainstream just once, in Theresa May’s first Tory conference speech as prime minister back in October 2016. Alongside promises to end “longstanding injustices”, she zeroed in on QE as having “bad side effects”: “people with assets have got richer”. But that was it. QE hasn’t been referenced in a prime ministerial speech since.

This silence isn’t only due to the Conservatives. After Jeremy Corbyn floated the prospect of “people’s QE” during his 2015 leadership campaign, monetary policy was virtually impossible for then-shadow chancellor John McDonnell to broach. People’s QE was far too easily presented as mere money-printing and, in the interest of avoiding a distracting side-debate, a deliberate decision was taken to park the issue of monetary policy and focus on fiscal policy – taxes, spending and borrowing – alone.

For the Tories, the reality of QE is that it has helped keep government borrowing costs down while rewarding those most likely to vote Conservative. And so QE, arguably the largest government economic intervention in Britain’s peacetime history, maintains its underwater existence.

That might be about to change. Long-time austerity hawks such as Fraser Nelson have used the Office for Budget Responsibility’s analysis of QE and the UK’s government debt to declare a debt crisis is imminent. Because of QE, they claim, the UK is becoming increasingly sensitive to interest rate changes. QE works by having the Bank of England swap its newly-created reserves, which are a kind of money, for government debt held by banks and other financial institutions.

[See also: The US and the EU’s stimulus policies show they have learned from the mistakes of the past]

Because the Bank of England, which is owned by the government, pays a variable rate of interest on reserves now held by banks and other financial institutions, the overall impact is to reduce the effective length of time the government has to repay (or roll over) its debt – the debt’s “maturity” is reduced as the government owes more payments to other financial institutions on short-term reserves. Nelson suggests that because of this, a single percentage point increase in interest rates would increase debt repayments by £21bn.

Sounds terrible. But the argument is fatally flawed: this “maturity reduction” happens solely because the Bank of England policy is to pay interest on reserves held by other financial institutions. These payments were introduced only in 2009. Removing the interest payments would kill the maturity problem for government, transferring costs to the banking sector, as the House of Lords report says. The Bank’s governor thinks this is a decision HM Treasury could take, presumably without challenging the Bank’s independence. But if the austerians have opened up an argument about debt and QE, a refreshed Labour front bench might take this opportunity to talk about its real problems – rising wealth inequality and the bending of the whole economy around property prices in the place of meaningful economic activity.