Business secretary says backing investment will unlock demand
Vince Cable has condemned the destruction of Britain’s once-thriving building societies and warned the coalition could be facing a more challenging economic environment than the 1930s because of the troubled banking industry.
As the business secretary on Monday outlined proposals to kickstart housebuilding projects with government and local authority guarantees, he warned that quantitative easing – the process by which the Bank of England is “printing” money for banks – might not fuel economic growth unless households think the benefits are going to be passed on to them.
In a speech that compared today’s economic environment with that of the inter-war years, the Liberal Democrat cabinet member said the existence of 1,000 building societies in the 1930s had created a “virtuous circle” of more mortgage lending leading to more house building. There had not been a banking crisis between the wars.
Cable blamed the lack of mortgage lending on the destruction of building societies. “This was one of the great acts of economic vandalism in modern times,” said Cable.
Guarantees for companies to invest in housebuilding and other infrastructure could help fill the void and help the economy recover, Cable said. Such a move could involve adding more debt to the government balance sheet but that would be justified by the jobs and growth in private sector business it would encourage, which should generate revenue for government .
“The experience of the 1930s tells us that it is possible to build and grow out of deep economic crises without abandoning [deficit reduction],” said Cable. “Indeed, growth in the 1930s radically improved the government’s debt position. That happened while the government more than doubled public investment.”
Speaking to the Liberal Democrat thinktank, Centre Forum, Cable called for expansion of schemes such as the business department’s enterprise finance guarantee, under which the government can guarantee £100m of debt but only add £20m to the public balance sheet.
This could trigger a virtuous circle of new building lending to increased affordability and also increased private demand for housing, he said.
Such a model could be adopted by local authorities following the lead of a few councils, such as Eastleigh in Hampshire, which invest in projects with a commercial return and use the benefits of their access to very low interest rates, he added.
“The public sector balance sheet has to be used to leverage in private capital, particularly in housing,” said Cable. “Demand has to be created, it does not emerge simultaneously. There is scope here to both create demand and solve a pressing supply need at the same time. Innovative approaches to public policy – making the most of the fact that our resolute action has given us a strong balance sheet – are the key to unlock this potential.”
He made reference to policies outlined last week by the Bank of England governor, Sir Mervyn King to funnel more cash into the banks, by offering them cheap funds provided they lent to business through was is known as “funding for lending”. The bank is also going to start providing sixmonth cash injections into the banks through its money market operations.
Cable said monetary policy was more important than fiscal policy in understanding the improvement in the economy during the 1930s when recovery took place “without a noticeable relaxation” in fiscal policy.