Eagle Eye (indyeagleeye) wrote,
Eagle Eye
indyeagleeye

Ben Chu: Cameron's crowding out of reason

David Cameron speaks at the CBI Conference (Photo credit: Steve Back - www.politicalpictures.co.uk)


Just where is David Cameron getting his economic advice from?


This is from the Tory leader's speech to the CBI today:

"The idea that the deficit brings the risk of higher interest rates for businesses and families isn’t a theoretical possibility – it is actually happening already. One of the things that is limiting the supply of affordable credit is that banks need to build up their deposit bases and become less reliant on unstable wholesale funding. But amazingly the most attractive – and therefore competitive - one year savings product on the market at the moment is actually being provided by the Government, through National Savings and Investments. So the Government’s need to finance its borrowing is already affecting the supply of credit to families and businesses - and its cost. In other words, government action is already beginning to crowd out the private sector."


So the Treasury-controlled NS&I puts an attractive rate on its bonds and this is crowding out lending to the private sector? Er, bit of a leap here. First, NS&I has a target of raising no new net money this fiscal year. See here, page 83. The size of NS&I liabilities are due to remain constant at some £97bn. How is this crowding other borrowers out?

Second, what makes the Tory leader think that if those funds went into deposit accounts, the banks would lend it out to the private sector? Money has been pouring into the banks thanks to capital raising and quantitative easing, but, as the Bank of England lending trends reports make clear, this hasn't boosted lending to small and medium sized businesses. Why? Because the banks are using these additional funds to repair their damaged balance sheets. They're not interested in new lending.


There's an even bigger economic fallacy in Cameron's thinking. As Paul Krugman and others have made clear, in these special economic circumstances, high public borrowing is, in fact, crowding in private investment, not crowding it out.


photo: Conservatives

Tags: cameron, crowding out, national savings and investments
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