A welcome boost - unless you're a bank

 

If you ask most economists why the UK economy has found it so hard to put the financial crisis behind it, high on the list would be the banks.

Laden with debt, banks are simply more reluctant to lend to ordinary households and firms than they were in the years before the crunch.

But the Financial Times (FT) believes that at least one banking hangover from the boom years has actually been doing the economy some good this year - maybe more good than the government initiatives to spur growth announced at the time of the Budget.

The UK's five largest banks have had to set aside nearly £9bn to cover claims for selling customers unnecessary payment protection insurance (PPI) on their loans, of which nearly £5bn had been paid out to customers by the end of May.

At one level, it looks like a simple transfer of money from the banks to households: our gain is the banks' loss.

But economists at the National Institute for Economic and Social Research believe total payments (which could reach £15bn) could end up boosting the country's growth by more than 0.2% of GDP. That's because households are more likely to spend that money than the banks, especially in a depressed economy.

Needless to say, that figure is highly speculative.

And it doesn't take into account the fact that banks making the payments might then be even more reluctant to lend. But, if it is even roughly right, it would mean that the PPI scandal will rival or surpass the Olympics in its short-term impact on UK national output.

The FT somewhat cheekily points out that the Office for Budget Responsibility did see fit to incorporate the impact of the bank payouts on household incomes, in its revised economic forecast at the time of the Budget. The OBR did not choose to make any similar adjustment as a result of the schemes to boost growth unveiled by the chancellor at the same time.

The chancellor would say the comparison is unfair. Most of the schemes he presented in the Budget were not expected to come into force for some time, and their impact was inherently difficult to predict. By contrast, the PPI payments were, by the time of the Budget, very much a known quantity.

But the basic point of the FT article still stands: the PPI scandal might be bad for the banks' reputation, and their balance sheets, but it is now putting money in people's pockets at a very useful time.

In a depressed economy, most would say that any boost is welcome, however unlikely the source.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 111.

    Conrad, deposits customers make are liabilities for the banks and accordingly are debt.

  • rate this
    +1

    Comment number 110.

    The Bank of England are using Quantative Easing (QE) wrongly.
    Surely growth comes from business selling their goods/services and creating profit?
    An alternative: give everybody above the age of 16 who earns below £80,000 per year £2,000. They will spend the money on bills, rent/mortgage, consumer goods etc. making profit for businesses and creating growth.
    Then http://robinhoodtax.org/

  • rate this
    0

    Comment number 109.

    @107.
    mattmatt81

    Funny that so many of you are ranting about Osbourne .

    Shame you were not being so principled in 1999- 2010 .

    Ie when the mistakes were being made , and the criminality ignored.

    ppi is just a manifestation of Labours aproach to the whole sector .

    Am not supporting Balls but at least he did a relant degree PPE and had some work experience, journalist for the FT for example. !

  • rate this
    0

    Comment number 108.

    In sum, the credit crunch, the POLICY of the leaders of the caitalist class, continues. So too does the struggle against it.
    The rich, legally & illegally fraudulent, protected, the poor suffering. This appalling ruling class and its hatchet men ask us the enjoy the circuses whilst they pile jam on their bread (at tax payer paid nosh-ups by the look of them) and salt away trillions

  • rate this
    0

    Comment number 107.

    Funny that so many of you are ranting about Osbourne .

    Shame you were not being so principled in 1999- 2010 .

    Ie when the mistakes were being made , and the criminality ignored.

    ppi is just a manifestation of Labours aproach to the whole sector .

 

Comments 5 of 111

 

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