UK government could stimulate with less inflation

June 8, 2012

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A lifeless UK, royal party aside? Yes, unfortunately. The Bank of England did not give the economy a shot more adrenalin on Thursday. Yet the third round of quantitative easing is still likely to come before the end of summer. The question is how much good QE3 would do. If action is needed to enliven the UK – and that remains arguable – it’s probably time for the government to be taking it.

There are objections to additional stimulus, whether monetary or fiscal. It’s far from certain that adding to the Bank of England’s already colossal 325 billion pounds of money printing would help reduce unemployment, the most pressing economic problem. And QE3 would bring an inflation risk, albeit more from global markets than British prices.

The awkward truth is that QE is certainly stimulatory where financial assets and commodity prices are concerned. And perhaps the best news for the UK economy and the global one in recent weeks has been the pronounced drop in oil prices from $120 to below $100 a barrel for Brent crude in May. Britons will soon spend less on fuel – provided oil prices aren’t stimulated up again. The drop came because of euro fear, but also because fresh money stimulus didn’t seem on the way. Fresh hopes of stimulus this week have pushed the price back up to $102.

The UK government, on the other hand, could do something for those unfortunate underused resources known as unemployed people. A bit of extra capital spending – repairing or building roads or providing new, much-needed social housing – would have little inflation risk given that domestic wages and spending are depressed.

The British government is, however, already pumping 8 percent of GDP more into the economy than it takes in taxes. Increasing spending when it has promised to cut it would invite taunts of a U-turn. But the aim should be to prune current spending excess to get useful investment spending up. And the important point for policymakers is that a further fiscal stimulus would run less inflation risk, and be more economically stimulatory, than another chunk of bond-buying from the central bank.

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