Bank of England has given Hammond £40bn of splurging room, economist says

Hammond
Philip Hammond has indicated he wants to spend more on infrastructure such as roads Credit: PA Wire

Chancellor Philip Hammond could go on a major spending spree in his Autumn Statement without fear of spooking the bond markets, economists believe, because the Bank of England’s policy of easy money has given him more wiggle room.

As well as slashing borrowing costs, the Monetary Policy Committee’s decision to fire up the printing presses and snap up more government bonds means the Chancellor has space to splurge, according to Magdalena Polan at Legal & General Investment Management.

Mr Hammond has indicated projects such as roads could receive investment, but LGIM’s figures indicate the space for such spending could be bigger than previously thought.

Ms Polan estimates that the room for manoeuvre could be as big as £40bn, or 2pc of Britain’s GDP, if the Bank of England buys another £60bn of bonds and Mr Hammond decides to follow through with his plan to abandon the deficit targets of his predecessor George Osborne. 

“The government has not done that in the past, as the focus was on the path to balanced budget. But under the new Chancellor and his push for a policy ‘reset’, and with the quantitative easing expansion by the Bank of England after the Brexit vote, there is indeed that extra space to use,” said Ms Polan.

“So if there is indeed a relaxation of fiscal policy, it could take many forms: income tax cuts, VAT cut, higher social spending and then also infrastructure spending, among others.”

She believes infrastructure spending could generate the most extra economic growth, with short term projects turning into longer-term productivity improvements.

The idea of more infrastructure spending is gaining traction.

Hinkley Point 
The future of some very large projects such as the Hinkley Point nuclear plant are in doubt

Former Bank of England deputy Governor Sir Charlie Bean told MPs this week that the scope for further interest rate cuts is limited, meaning other policies such as extra government spending could help instead.

“Most economists would say at the current juncture with very low real interest rates, public infrastructure looks more attractive,” he said.

Sir Charlie cautioned against overdoing it, however: “You don’t want public debt exploding. There is room in the short term, but it is still pegged down in the long-term.”

Last week Mr Hammond said he is considering fiscal measures to provide a “quick” boost to the economy in a “well designed” way.

“I think there is a role for big strategic projects, but they are unlikely to ever be able to contribute to fiscal stimulus because of the timelines involved,” he said.

“Often it is modest, rapidly deliverable investments that can have the most immediate impact, particularly on the road network, but also in some places on the rail network.”

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