A welcome boost - unless you're a bank

  • 7 August 2012
  • From the section Business
  • comments

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.