Central banks can’t save the world. Can governments?

The task of preventing deflation and stimulating growth will soon be passed from central banks back to governments, says Merryn Somerset Webb. Here’s what that means for you.


Central banks could soon pass the ball to governments

Not many can do misery quite like Mohamed El-Erian, the chief economic adviser to Allianz, FT columnist, and author of just published The Only Game in Town: Central Banks, Instability and Avoiding the Next Crisis

He was at a lunch I attended this week held by Pi Capital, where he talked a bit about his new book. Think back to a year ago, he said. Who could have known that interest rates would be negative everywhere from Sweden to Japan; that some 30% of global government bonds would have negative yields (you get to pay to own them); that China would have made a nastily long list of "policy mistakes"; that the oil price would have toyed with $20 a barrel; and that Donald Trump would be on track to be the president of the US.

With a few notable exceptions, if you'd handed that list to most people a year ago, they would have declared you completely bonkers. But when it comes to modern economics, all too many of the things that once seemed impossible are now probable.

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It's all down to the fact that we have been relying on our central banks to save the world when it turns out that they can't. The growing recognition of this fact can be seen in the global reaction to negative interest rates: they've given us instability and sharp rises in the gold price.

They haven't given us much in the way of obvious benefits, because they just don't work. The consensus among economists (which I don't entirely agree with, by the way) is that this means that it is time for governments to pick up the baton with a variety of monetary and fiscal policy.

There should be debt forgiveness (starting with student loans). There should be handouts in the form of "helicopter money" vouchers. There should be full-scale debt monetisation followed by new borrowing for whopping great infrastructure projects. You know the stuff there is an outlandish suggestion in one paper or another most days.

Mr El-Erian has suggestions too. Read his book for the full list of things global policymakers could do together to renew the global economy (he doesn't just do misery he does dreamy too). But the simplest and quickest way to get started, he told me after lunch, would be to "reform corporation tax". He was talking about the US where the rates are ludicrously high and the complications even more absurd than they are here. But it may well be that George Osborne has had him round for tea in the last few weeks too.

Look at Wednesday's Budget and you can see that he buys the fiscal proposition and the idea that he can get started on it with a bit of play in the rate of corporation tax. I think 17% is low. Very low it will be the lowest rate in the G20 in 2020.

Shifting the indexation of business rates from RPI to CPI is nice too and, given that CPI is generally lower than RPI, it is an effective tax cut. The breaks for smaller companies aren't bad either: they got a stamp duty cut and hundreds of thousands of them will do well out of 100% rate relief on firms with property with a rateable value up to £12,000.

But that's not the only good news for businesses. Look at the shift in capital gains tax the rates have fallen from 28% and 18% for higher-rate taxpayers to 20% and 10% for basic-rate taxpayers. That's a major cut. And it is particularly interesting because chief executives of several big firms have told me recently how much pressure investors are putting them under to keep their dividends high (with rates this low, dividends are the one place the income-starved reckon they can go for a hit).

That's why income funds top the list of the bestsellers in the UK month after month after month why fund managers need to see income high and rising, and why one FTSE 100 CEO told me a few weeks ago that he "would be out of a job" if he cut his dividend. But if your rate of capital gains tax is very much lower than that of your dividend tax (which now comes with a top rate of 38.1%), perhaps you might push for growth over income?

Perhaps you'd encourage the kind of investment that drives up capital values over payouts? That would be good for all of us. Down at the smaller end, getting your hands on capital for growth also just got easier too: Entrepreneurs' Relief (which reduces capital gains tax to 10%) is to be extended to include long-term investors in unlisted companies. All those very well paid people who are a few weeks away from seeing their pensions tax relief allowance cut to £10,000 a year guess where their money is about to go? Quite.

Finally, on the small business front we got what you might call the "sofapreneurs allowance" anyone selling online or renting out bits of their house or garden gets a £1,000 income tax allowance. You could be cynical and say that Mr Osborne knows that HMRC can't be bothered with explaining to these people that tax is due on their trades and with chasing that tax down any more. It is just too boring. But I like to think that he is deliberately trying to encourage people to develop secondary streams of income for themselves and to spur them into making hobbies into salaries.

My point is that, while a lot of the commentary around this Budget has suggested it is all a bit pointless, I think there might be a bit more to it. The task of preventing deflation and prompting growth will soon be passed from the central banks back to governments. Then those governments will choose which groups to support. We are getting plenty of hints as to which those groups will be. First-time buyers are obviously one. Smaller companies are obviously another. So what do you do?

Once you have read Mr El-Erian's book you might just want to panic (in which case, buy more gold). But otherwise you could remember that when you tax something less you are likely to get more of it. With that in mind one stock to look at might be business software company Sage. It's a liquid way to buy into the sheer number of small companies rather than the success of any particular one of them. And a nice way to have a go at benefiting from an awful lot of Mr Osborne's tax breaks in one go.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.