What happens when PPI cash runs out?

 
PPI form

There is more evidence today of the strength of Britain's recovery in the confirmation that the UK's car market last year returned to the kind of buoyant conditions not seen since before the 2007-8 crash.

There was a rise in motor sales of almost 11% to 2.26 million vehicles, according to the Society of Motor Manufacturers and Traders.

What has been happening? Consumers have been feeling more confident, credit is more readily available (around three quarters of private purchases are on credit) and PPI compensation payments have provided the few grand needed for the deposit.

Which brings me to one of my nagging worries about the UK's recovery (I have a few, as you know).

What happens when the PPI payments stop flowing?

In a very unorthodox way, PPI rectification has been a big money-creation exercise for the benefit of consumers.

Over 18 months or so, banks have paid out around £12bn to those mis-sold the credit insurance, out of a total that they currently expect to pay of £16bn.

It represents an economic boost equivalent to circa 1% of GDP - which is big. It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.

That said, it is difficult to judge whether PPI compensation has been more effective in encouraging the recovery than quantitative easing, or Funding for Lending or the two phases of Help to Buy.

But those initiatives are qualitatively very different from the PPI stimulus - they all in effect pump mind-boggling quantities of cheap loans into the economy, or money that eventually has to be paid back, whereas PPI compensation is a handout of free, no-strings cash.

Or to put it another way, PPI compensation is as close as we've seen to what the economists call "helicopter money" - or the distribution of bundles of notes to everyone (or in this case, many millions of households).

Start Quote

So PPI cash just might be the reason why the recovery here looks as though it was the fastest anywhere in the developed world during the last three months of 2013”

End Quote

Which is not to say that the PPI cash imposes no costs anywhere in the economy. To the extent that the payments have depleted banks' capital resources, it may have been a further suppressant of their appetites to lend.

But, as we know, this negative impact would have been marginal, because banks' desire to lend was already depleted.

Now what is interesting is the evidence that consumers are spending the cash, rather than using it to reduce debts. That at least would be a reasonable conclusion to draw from the recovery of sales of more expensive items, from cars to holidays.

In that sense, the PPI cash appears to have turned up at the economically most propitious moment, when consumers have tired of darning their socks (metaphorically speaking) and belt-tightening, and have decided they (we) deserve a treat.

So PPI cash just might be the reason why the recovery here looks as though it was the fastest anywhere in the developed world during the last three months of 2013, a touch faster even than in re-energised America.

But the PPI tap is now being turned down. The question is whether the economic momentum it has helped to generate can now become self-feeding and self-reinforcing.

It would, of course, be wholly inappropriate for the Treasury and the Bank of England to hope for the banks to play tooth fairy again, by compelling them to pay yet more cash to all of us in rectification of others of their past sins.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

Are Scotland's new tax and spending powers fair?

Possibly the most important economic decisions relating to Scotland's new powers, on the size of the grant Scotland will receive in future and how much it can borrow, are yet to be taken.

Read full article

More on This Story

More from Robert

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +1

    Comment number 35.

    the government's been helicoptering in vast QE sums on to the burning economy below with zero dousing of the conflagration.
    someone should explain to GO that only money paid directly to the voter, not to a financial institution will win a vote and also stimulate the economy.
    Tax cuts for the least well off is the best way forward.

  • rate this
    +13

    Comment number 34.

    "What happens when PPI cash runs out?"

    The tax payer gives the bank more money so they can pay us back with our own money?

    That's generally how it works isn't it?

  • rate this
    +1

    Comment number 33.

    If I buy something defective from a supermarket, it goes back and gets replaced/refunded with minimal questions asked.

    If a builder makes home repairs than don't do the job, even that 'cowboy' industry can usually be expected to put the job right.

    Yet banks and financial products are different? There're some surprise posts here blaming the consumer rather than seller. Why?

  • rate this
    +2

    Comment number 32.

    Domestic consumption should be suppressed by increasing direct taxes, VAT and interest rates THEREBY encouraging (aka forcing) businesses to export in order to sell their products.
    Reduced consumption would also reduce imports THUS increasing net exports.
    Trade imbalances are the major global issue.
    Alan

  • rate this
    +12

    Comment number 31.

    Are the people benefiting from PPI payouts (on loans that a majority couldn't really afford to take) the wrong people to be handing a few grand to? As the article above states, these people aren't using these payments to clear more of their debt. Instead they're out using it as a deposit to get more 'gear' on HPI...And thus the whole cycle begins again.

  • rate this
    +2

    Comment number 30.

    @24.Truth logic sustainability..
    "Biggest direct stimulus boost to UK economy has been low mortgage rates, which enables £18 + billions of extra expenditure a YEAR."

    Created in part by QE.
    So offset against the 18B+ the cost of
    Lower Sterling
    Lower Anuities.
    Higher fuel costs
    Higher import costs.
    and a future pensions time bomb (still ticking)

    Todays stimulus 18B+
    Tommorows cost unknown !!

  • rate this
    0

    Comment number 29.

    unfortunately when 'Help to Sell2' hits the buffers, who will bail out the government.....no Payment 'Protection' insurer to reimburse the misspelling, just the taxpayer's money AGAIN.
    austerity, prudence, hard truths, no return to boom and bust, soundbite politics which indicate that the government is heading in the opposing direction .
    10 years hence the 'opt in' pension could provide compo..

  • rate this
    0

    Comment number 28.

    @4.mog499
    you're making ti too complicated, growth is increased spending,
    the sum of total final consumption spending , total private investment, total government spending & net exports.
    we know the last term for the UK is always negatve, currently the 1st term is the driver, some but NOT the majority from spending savings, the article question is, does PPI account for the the non-savings spending

  • rate this
    +1

    Comment number 27.

    17.alan
    We can confidently rely on the banks to keep making cock-ups and having to pay compensation for at least the next 10 years.
    ----
    Indeed we can and such 'losses' are underwritten by tax payers.

    Don't you just love picking up the tab for crook's mistakes?

  • rate this
    +2

    Comment number 26.

    Let's be honest.
    Anyone who paid for PPI when they didn't need it, or took out an interest rate swop without understanding it, or changed from a defined benefit to a defined contribution pension scheme, simply should not be allowed out on their own.
    All the banks were doing was speeding up Darwinism.
    Alan

  • rate this
    0

    Comment number 25.

    cpp!!!!

  • rate this
    +2

    Comment number 24.

    It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.

    ++
    What hogwash.

    Biggest direct stimulus boost to UK economy has been low mortgage rates, which enables £18 + billions of extra expenditure a YEAR far greater than PPI .
    See what happens when interest rates rise

  • rate this
    0

    Comment number 23.

    And still some on the right are completely in denial about the damage that banks are continuing to do to our economy.

  • rate this
    +2

    Comment number 22.

    @14.MaddestMax "What happens when PPI cash runs out?
    Well, couldn't we sue the pants off the banks for fixing the interest rates for years (libor)."


    Sadly LIBOR fixing actually reduced the mortgage payments for millions of people. Thats why no anoying phone calls.

    Lets prey that the banks don´t ask for it back!!!!!!!!!!!!!

  • rate this
    0

    Comment number 21.

    #1 Friendlycard

    I agree.

    It would be nice if the Govt acknowledged this publicly.

  • rate this
    +3

    Comment number 20.

    What happens when PPI cash runs out?

    We will not have to put up with endless adverts on TV.

  • rate this
    +1

    Comment number 19.

    What recovery? All I can see is a housing bubble, a few people getting rich off tax avoidance and mass exploitation, and millions of us suffering. That's not an improvement.

  • rate this
    +17

    Comment number 18.

    It's not really a recovery as our productive output has not increased in any way due to the payouts.

    However, what we have had is a neat demonstration of the difference between PPI payments (re-distributing a meagre amount of wealth from the rich to the poor) and all the other stimuli (QE, HTB, FLS, artificially low interest rates, bank bailouts, and so on) which move wealth from poor to rich.

  • rate this
    0

    Comment number 17.

    That's why I'm confident about a consumer-led recovery.
    We can confidently rely on the banks to keep making cock-ups and having to pay compensation for at least the next 10 years.
    They are providing a Keynesian-type public service.
    We should all be grateful.
    Alan

  • rate this
    +1

    Comment number 16.

    So, helicopter money from the banks stimulates growth but loans from the government increase debt?

    This demonstrates three things:

    1) Where the money (and power) now lies
    .
    2) That rent-seeking banks have been a money-hoarding drain on the economy.

    3) Government intervention can work.

    Will the right people take heed?

 

Page 13 of 14

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.