Martin Wolf believes the government's Spending Review plans are like going climbing without a rope:
If businesses are to invest so strongly, they need to believe that demand will remain robust, come what may. In sum, a credible Plan B is not an optional extra. It is a necessary condition for a successful Plan A
Yet it remains depressing that investment spending was slashed at a time of slack demand, when the government can borrow so easily. That is classic Britis short-termism.
The decision to leave its “Plan B” to the Bank of England is another gamble. When the long-term interest rate on government bonds is down to 3 per cent, the impact of more “quantitative easing” is likely to be minimal.
This government has, in essence, decided to go political rock climbing without ropes.
We agree with his two key points: that business investment has to be part of a credible 'Plan A' on the economy, and that the benefits of additional QE are likely to be minimal.
All this week, we've been setting out our 'Plan A' for the economy - simple, targeted ways the government could help ensure we see a boost to [rivate sector investment in the coming years (see the links below).
But the QE point bears discussion.
Essentially we have two concerns about additional QE. The first £200 billion didn't have a great impact on the wider economy or money growth (in psuedo-eco speak, the transmission mechanism wasn't operating properly), so what makes either the Bank or the government confident that a ride on the QE2 be anymore successful?
And while the benefits of further QE are likely limited, the risks may not be. More QE could help push up asset prices, either here in the UK or abroad via carry trades. And this would just store up problems for the future.
So our view isn't to rule out QE altogether, but to pursue a proper 'Plan A' that will help boost investment and rebalance the economy.
Going for growth in the UK
Monday: A 'Plan A' for growth
Tuesday: The UK is OK (for now): Putting growth into context
Wendesday: Growth Plan Part I - A better partner to business
Thursday: Growth Plan Part II - A stable and predictable business environment
Friday: Growth Plan Part III - Investing in the future of growth