The problem with any macro-economic stimulus is that a large economy is a mix of small economies. The problem the UK shares with other western economies is that the acceptable stimuli have become few.
What's available in the arsenal?
The Bank of England has base rates, quantitative easing (QE), a target consumer price inflation (CPI) of 2% (which is currently 0.6%), and a commitment to a stable financial system. The government of the day can tinker with tax rates and/or overspend (i.e. borrow).
These are simple and crude weapons.
Investment decisions are not simple or uniform in their nature. UK business needs to consider the reliability and cost of supplies, the likelihood of customers at the right price, and satisfy a host of planning, environmental, labour and tax laws to get between the supplier and customer.
Then there is the cost of financial capital to consider.
[su_pullquote]The added uncertainty now is how long will interest rates stay down. How and when will QE ever be unwound?[/su_pullquote]
Tax on financial capital is changing its cost. Environment and labour laws and practices may change as the UK withdraws from the EU, as may access to overseas supplies and customers. UK planning laws have long been used to defend ancient city centres and greenbelt. If they hadn't, the lovely Georgian city of Bath would look like any other modern urban centre, and Londoners would live and work in the shadow of motorways. But where are the new power generation facilities to replace those that have been shut? And where is the housing for the growing population?
Too much change at once is difficult to digest. The variables in the business plan become too many. The best case and the worst case scenarios move further apart. Where you may end up in the gap between becomes less certain.
The increase in QE has brought down gilt yields and corporate bond yields have followed. Corporate debt is cheap by any measure. At the long end it is less than the nominal CPI target and it is not indexed. A certainty today is that buying gilts will be value diminishing, but pension funds must buy gilts.
The added uncertainty now is how long will interest rates stay down. How and when will QE ever be unwound?
Some corporates have started to borrow. Whether they invest directly or pay out to shareholders or top up pension funds is not relevant. Money, as we say in corporate finance, is fungible. It will end up in someone’s hands to invest, but what is borrowed in the UK may not be invested in the UK without capital controls - the macro-economic tool at which we communally shudder.
The UK has a history of defined benefit (DB) pension funds. It has such long a history that even those companies who closed theirs years ago still have DB funds because we have become very good at staying alive, and so the assets accumulated in the past cannot meet the forecast liabilities of today.
Tata Steel and BHS may become in time known as the beginning of the end of DB funds: the point at which we began to consider whether we want comfy pensioners or businesses with tax-paying employees to fund all that social infrastructure which helps us to live so long.
There is another scenario the government would be advised to consider that may have arrived: corporates issue cheap debt, which is bought by DB pension funds in competition with QE to meet ever-increasing liabilities as interest rates fall further, and using the money given to them by borrowing corporates as contributions or distributions, while more corporates issue cheap debt...
