Many economists have described the Chancellor's new budget as a turning point in the economic crisis, that will determine the economic strategy for his remaining tenure. The question was raised whether the Chancellor would stick to the same austerity programme or adapt the formula to reignite growth through government intervention.
There were some tactics to stimulate growth including a £130billion guarantee for mortgages in an effort to boost the ailing housing market, an increase in the personal tax allowance for the starting rate to £10,000 and a reduction in corporate national insurance tax. However none of these measures are likely to give the economy the boost it needs to get through this 'difficult' year, in which the economy is likely to fall back into a 'Triple Dip' recession.
As the efforts made by the Chancellor to increase growth through fiscal policy are not what many economists would deem sufficient, it is likely monetary policy will be used to compensate for the lost demand required. In fact the Chancellor himself stated that he would be depending on the Bank of England to support the economy and has given more flexibility through choosing growth in precedence over inflation targeting.
This move was necessary to provide the funds needed to meet money supply targets within the economy. As the economy needs a certain amount of money in it to function properly, money supply targets have to be met or growth will be impossible. The level of money within an economy is determined by monetary and fiscal policy.
Monetary policy is the control of the supply of money and is set by the Bank of England through interest rates, quantitative easing and qualitative easing. Fiscal policy is the intervention of the government and is set through taxation, government spending and government borrowing. The relationship between Monetary and Fiscal policy is called the policy mix, which determines the money supply and structure of an economy.
As the level of government spending and taxation has not allowed sufficient room for the economy to expand, the Chancellor has had to give the Bank of England more room to enable economic growth through monetary policy. Interest rates are already at record lows and difficult to lower any further, leaving either qualitative or quantitative easing as the mechanism to maintain money supply.
Quantitative easing is a more likely move than qualitative easing and will likely be the option the Bank of England will take. It is probably just a matter of time before an extension of the quantitative easing programme, which already stands at £375billion, occurs. Unfortunately this is likely to create inflation later on in the business cycle so the Chancellor's budget may bring about more problems than it solves. If you would like to read more about the consequences of QE you can do so here.Suggest a correction