Jonathan Todd

Good analysis of the economy and public finances from Larry Elliott. He’s right to identify the struggles which some companies are still having in accessing finance as a key challenge as the pre-budget report draws nearer.  It must be a major worry that lending to businesses fell by £4.6bn in September – the eighth successive decline. What can Alistair Darling do about this?

Almost certainly less than the Bank of England may potentially be able to. “Inexplicably”, Willem Buiter convincingly argues, ”the Bank of England has not made full use yet of the instruments it has at its disposal.” Interest rates may go lower still (to zero or even beyond) and quantitative easing, which has taken a markedly different form in the UK from the US, might be revised in the UK. The UK’s programme has produced, in round terms, £2bn of outright purchases of private securities and £169bn of Treasury securities. There is a strong argument that shifting the balance between these purchases would do more to get credit flowing to businesses.

This isn’t a shift which it is within Darling’s gift to make, however, and Buiter does not anticipate “much joy … from fiscal policy as a means for boosting aggregate demand in the UK in the short run”. So, Darling’s ability to get credit flowing is constrained. Nonetheless, he’ll come under some pressure to provide greater fiscal stimulus in the pre-budget report. This might be a last gasp of Keynesianism. For this gasp to achieve anything, though, it needs to be the kind of smart Keynesianism that I have previously praised. This is a Keynesianism that recognises that what the government spends its money on matters as much as how much it spends.

The next round of monetary and fiscal stimulus must both put an emphasis on quality, not quantity. Well targeted government spending can make a difference, even on a limited scale, and the form which quantitative easing takes is as important as its scale. If these revisions can be made on both the fiscal and the monetary fronts, businesses may be able to access credit on more favourable terms than they can at present and, if this were to be the case, the green shoots really would be coming into view.