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 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 .

  • rate this
    0

    Comment number 106.

    Banks are ISSUERS of DEBT, they are certainly not LADEN with DEBT.

    How can a Bank be laden with debt? Did it borrow from itself?

  • rate this
    0

    Comment number 105.

    @103. uniques

    "Did Osborne's End of Year School Report give him an F for Economics"
    No it didn't - because he has not studied Economics to Degree Level - he studied Modern History at Oxford. He then re-folded towells at Selfridges for a while, before joining the Conservative Party. He really wanted to be a Journalist - so has a natural tallent for spin.

  • rate this
    0

    Comment number 104.

    King IS doing a lot. He's pumping in QE & financing cheap bank lending, ie INCREASING govt debt.Hence the call for EVEN MORE cuts & penny-in-the-£ sell-offs to finance capitalism, funded by King Thus he gets,by giving the banks slush-fund money, one aim of the crunch he & Greenspan created as a POLICY.
    0% GDP 2012? Too optimistic-sand in the face of his pursuers-June manufacturing down!

  • Comment number 103.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 102.

    Welcome back. Here, a German models us, the people, & his burden the economists like Mervyn King...
    http://www.youtube.com/watch?v=ndWdJVClt2w
    who despite presiding over the financial sector for decades still is not calling for it to be WHOLLY publicly owned
    Banks corrupt, their money coming out of thin air and King didn't notice it?
    GDP, where spending comes from, IS his biz.

  • rate this
    0

    Comment number 101.

    It goes beyond PPI. If the banks did not pay themselves massive obscene paypackets and bonuses, and shareholders got their fair share, GDP would be up also.

    If the bailout money was instead handed to the people on the premise it was used to pay down debt, the banks would still survive & the crisis would have been over by now with higher inflation the only worry.

  • rate this
    0

    Comment number 100.

    Monies paid out in PPI compensation will not have a significant effect on the economy since lots will be spent on holidays abroad, imported goods and paying down debt.

  • rate this
    0

    Comment number 99.

    96.armagediontimes "Is everyone mad?"

    No, just the economists/Bank of England/HM Treasury and their buddies.

    Nero like they are fiddling as the economy and the Nation burns to a cinder.

    They really need to study the economic of post crash recoveries, which are well document from the 1930s.

    First we have to have debt, and related asset deflation, or nothing starts up again!

  • rate this
    0

    Comment number 98.

    96

    1) Yes it is.
    2) Yes.

  • rate this
    0

    Comment number 97.

    86. Crookwood "I get it, but I'm worried .."

    There is no simple painless option. No action = depression, just like the 1870s but actually far worse for 30 years.

    Remember in the 1960s when credit growth was considered to be too fast volume controls on Hire Purchase were introduced - that is similar what we need now.

    The roller-coaster we are on now is down only!

  • rate this
    -1

    Comment number 96.

    This article implies that fraud is economically beneficial.

    Is everyone mad?

  • rate this
    0

    Comment number 95.

    94 aircraft

    Get your facts right .
    You are confusing different schemes .
    What the now call QE is the purchase by the BOE of high class assets using money put directly onto their balance sheet .

    The high class debt is gov bonds ,agreed they are purchased at over TRUE market rate . But

    You are deliberately confusing the scheme with a different far smaller short term system .

  • rate this
    -1

    Comment number 94.

    74.
    mattmatt81

    You don't get it do you? Read 87. Make money directly available to the population not the institutions. Low wages cripples economies in the long run. Short live the rich.

  • rate this
    0

    Comment number 93.

    What a sorry state of affairs, the only way to get some spending money in peoples' pockets is if they've been swindled and then they get their money back. And Osborne's 'stimulus' isn't going to work for ages, if at aii. No wonder the BoE is downgrading growth prospects for the rest of the financial year.

  • rate this
    0

    Comment number 92.

    Not only is the band playing, the EU commission is booking up their cruise holidays for the next 10 years.

 

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