Lockdown savers can ride to rescue us all

Vast amounts of money are sitting idle in banks, ready to be unleashed to put the economy back to work

The Chancellor, Rishi Sunak, is preparing an emergency budget to get the economy moving. Assuming that the Government gets a grip on lifting lockdown, the economy has the potential to recover faster than many people realise.

This is the most unusual of economic crises. The short-term financial costs, to be paid off over many decades, are trivial compared with, say, the cost of the Second World War. Growth has, in most cases, been deferred, not lost altogether. But there are nearly nine million underemployed, either through being furloughed or unemployed. The uncertainty about the future is debilitating for us all.

What is not commonly understood is that, following huge interventions by the central banks of the world, there is also a record amount of money in the economy, piled up uselessly in bank accounts earning close to zero interest. Assuming the private sector is allowed to put that money to work, we could find ourselves suddenly experiencing a dramatic rise in activity.

One of the most neglected economic indicators is the money supply. So-called “broad money” is growing at four times the usual rate, according to the Bank of England. Households paid back a record £7.4billion of debt last month, three times the previous record. The Resolution Foundation, a think tank, even claims that two out of five high-income families have improved their household budget by cutting spending but maintaining their income during the lockdown, although the situation is obviously different for many lower-income households.

The situation brings to mind a passage in Macaulay’s History of England. During the political upheavals of the 17th century, nervous households had been squirrelling away wealth “in secret drawers and behind wainscots”. After the ascent of William III to the throne, “a great crowd of projectors … employed themselves in devising new schemes for the employment of redundant capital”. The result was a financial revolution and the founding of the London Stock Exchange.

The key is for the Government to enable an acceleration of the rate at which this money goes to work by enhancing consumer, business and investor confidence. Stock markets are rising at their fastest rate on record. In April, companies raised a colossal £16 billion of external finance to strengthen their balance sheets. Individual investors have also been busy, with stockbrokers reporting record levels of new business.

There are those who may worry that a surge in spending will trigger inflation. A look at a second neglected indicator should help calm those concerns. Strange as it may seem, we are living in an era of cheap and abundant energy unseen since the Industrial Revolution. The collapse in the oil price has been amplified in other energy markets, notably electricity. Renewables, cheap storage capacity, a ready international supply of natural gas, and interconnectors with Europe, all mean that the cost of wholesale electricity has also tumbled. There should be substantial discounts to energy and fuel bills.

What should Mr Sunak do to give confidence a lift? The first priority is to restore a sense of pace, urgency and legal practicality to easing lockdown. As it stands, the state appears to the world to be depressingly incompetent, whether it be in relation to the 14-day travel quarantine or the lamentable failure to reopen schools. Simon Wren-lewis, an Oxford economist who has studied previous pandemics, claims that closing schools makes the economic situation three times worse, due to the disastrous impact on working mothers and children.

What we need is reforming ambition and drive. The podgy British state needs to get match fit. A couple of pence on fuel duty; linking pensions simply to earnings, so all generations are in the same boat; enhancing investment allowances for firms; cutting stamp duty; bringing in the private sector to fund and deliver infrastructure; axing the nonsensical Help to Buy scheme; grants to hard-up families with children; and cutting the usurious student loan interest rate should all be considered as devices to restore confidence. The private sector will deliver a strong recovery, if the Government allows it to do so.

George Trefgarne is chief executive of the Boscobel & Partners consultancy