There may be even more trouble ahead – last week’s announcement of Subsidised Loans

Last Thursday, George Osborne, Chancellor of the Exchequer, and the Governor of the Bank of England, Mervyn King, jointly announced a new measure to stimulate economic growth. They also, importantly, did not rule out more quantitative easing.

Mr King prescribed a recipe of subsidised credit, estimated to be worth about £80bn –already known as ‘funding for lending‘. Technically, it consists of auctions by the Bank of England of loans totalling a minimum of £5bn a month for 6 months at a minimum rate of the Bank Rate plus 25 basis points (currently 0.75 per cent).

They feel this is required because the volume of loans to non-financial companies has been falling since the onset of the crisis: the chart below shows that less money has been loaned than the month before, almost every month, since February 2009.

Monthly changes

However, it is over this period that the Bank of England has embarked on a policy known as ‘quantitative easing’ (QE), with the similar objective of increasing liquidity (i.e. more money in the markets) and propelling economic growth. As the chart above shows, the policy has had very little positive success in increasing credit and similarly with regards to economic growth, which has been very disappointing.

Below is a ‘word cloud’ that shows the words most frequently used by Mr King in his speech (apart from common words such as ‘the’, ‘and’, and so on). The Bank of England views the current crisis as a liquidity problem within the banking sector deepened by increasing uncertainty from the Euro zone which is affecting private investment.

Finance cloud

But this is only part of the story. Yes, the woes of the Euro zone –UK’s most important trade market- do affect our economy. However, this new policy does not tackle some of the deep-seated problems at the bottom of our underperforming economic competitiveness such as the increasing trade deficit in goods not fully offset by our strongly performing services sector, the costly infrastructure bottlenecks, the structure of corporation tax, or the free fall in UK’s international ranking in education, skills, and human capital.

What is the impact of the ‘funding for lending’ initiative on older people?

As a result of this policy measure, older people running small and medium firms, as business people in general, might be able to obtain funding cheaper than they can today –but without a change in expectations, linked to more positive national and international economic prospects, how many would really rush to their bank to get a loan to invest and for how much? Some firms’ plans to expand may be currently hampered by the increasing cost and scarcity of credit, but the main problem lies elsewhere: most economies are weak and confidence is low, meaning firms are afraid of plunging in very treacherous waters.

With regards to older workers, they are unlikely to see their earnings increased or their positions more secure because of this measure. If poor annuity rates are meaning people are facing up to working for longer older people looking for a job are unlikely to find more opportunities being created. Again, this is true of all workers and job seekers.

Because they are much less likely to have mortgages older people will receive less benefit from any positive impact which might trickle down to the mortgage markets.

Annuities will continue to suffer and hit hard people reaching retirement: in May 2012 a £100,000 pension pot bought an annuity worth about £900 a year less than when QE started –equivalent to earning £160,000 less over the following 18 years.

A final thought. The Chancellor said: “Theory and evidence suggest that tight fiscal policy and loose monetary policy is the right macroeconomic mix to help rebalance an economy in the state I’ve just described.” The Governor expanded: “Here in the United Kingdom, the big picture was, and remains, the need to generate a recovery while rebalancing our economy, supported by a loose monetary policy and a large depreciation of sterling, on the one hand, and a gradual but steady reduction in the structural budget deficit, on the other.” This suggests not only that more expansionary policy is on the cards, but also that more budget cuts are coming.

I am afraid last week’s announcements do not bear good news for older people.

Last year Age UK’s More Money in Your Pocket campaign helped 500,000 people put £120 million back in their pockets through free benefits information and advice. This year, we will continue to break down the barriers that prevent people from claiming. For more information, please visit

2 thoughts on “There may be even more trouble ahead – last week’s announcement of Subsidised Loans”

  1. It is a funny business running the country. You have George Osbourne as chancellor of the country where he became an expert on all things financial overnight. Had the cabinet been put together differently then overnight he would have become an expert on the NHS or on schools or even defence.
    Anyone who is not a politician and at a ‘not in charge level’ would have had to have lots of experience, qualifications and a natural apptitude.
    It is not exactly rocket science. The more you cut, the less money there is around. Take the knock on from your public sector cuts and the knock on after that and eventiually there is less around for everyone. Recession is inevitable and a blind faith that the private sector is just magic and can do anything and grow when everyone has less money to spend with them is well … hm ….. I think the word I am looking for is amateur.

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