Labour must challenge the Tories on quantitative easing

5th March, 2009 1:05 pm

By Rachel ReevesPounds in hand

Today is an historic day in tackling the recession. The Bank of England has already cut interest rates to an all time low, so today’s cut in the base rate to just 0.5% is a side show. The real story is that the Bank has started to pursue quantitative easing, to the tune of £75bn – directly buying government and corporate bonds.

Some businesses and the government will now be able to borrow directly from the Bank of England, side-stepping the commercial banks who are either unwilling or unable to lend. The move will boost the amount of cash in the system, something even unprecedented cuts in interest rates has struggled to achieve.

Politically, Labour must now challenge the Tories on whether they back these moves. So far they have emphatically denounced quantitative easing: George Osborne called it the “last resort of desperate governments”. But the greatest risk here is not inflation but deflation. Inflation increases when demand exceeds supply. This is the opposite of the problem we face – where demand is drying up and workers, capital and property are under-utilsed. The potential of quantitative easing to get the economy moving outweighs the risks. And we should be mindful of lessons from abroad. The Japanese waited a decade before they used quantitative easing. The government and the Bank are right to use all the tools at their disposal.

If the Tories are willing to leave stones unturned when fighting the recession – as has already been illustrated by their opposition to government spending, then that acceptance of more job losses, business failures and home repossessions must be exposed. Labour is offering real help to businesses and families. The Tories must be asked again and again why they doggedly stick to an ideological position of small government when the public, and all the evidence, cries out for support during these unprecedented times.

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