UK election could prompt helicopter money

The results of last week’s shock UK election could prompt the launch of helicopter money as austerity and debt reduction become politically unpalatable, according to Deutsche Bank.

The central bank action involves providing loans for governments to boost the economy through fiscal policies, such as infrastructure spending or one-off tax cuts.

The strong youth vote in the election, which is believed to have contributed to swings to Labour, means policy needs to become more “redistributionary”, the economics research note by strategists by Jim Reid and Sukanto Chanda argues.

Early data suggests around 70 per cent of 18-24 year olds turned up to vote at the snap election compared to figures between 38 per cent and 54 per cent in elections taking place from 1997 to 2010.

“If confirmed this has major ramifications for politics and financial markets over the next few years in the UK and possibly further afield,” Deutsche Bank says. “In the UK we have huge intergenerational wealth issues (e.g. young in debt and can’t afford to buy a house and the old with large wealth in their house and other asset) but if the young don’t vote and the elderly do its difficult to see how this changes.”

The strength of the grey vote means politicians will struggle to tax the old to give the young a helping hand, the note says, while arguing austerity and debt reduction are looking increasingly like political suicide.

“As we’ve stated many times before over the last 12 months we think that over a long sweeping cycle we’re at an inflexion point. In short Governments can possibly be forced to spend more across the developed world until bond markets rebel at the high level of debts that this implies and then central banks would be forced to monetise this debt. Thursday’s election makes helicopter money more likely in my opinion.”

Following last year’s vote to leave the European Union a group of economists publicly called on the UK government to establish a “new collaborative relationship” with the Bank of England in order to create helicopter money in response to Brexit.

M&G Investments macro fund manager Eric Lonergan, who was one of the signatories, argues the UK has no contingency policy for a sharp slowdown in growth.

“The major mistake recent UK government’s have made is to obsess about the gross level of government debt, while ignoring the net public sector debt. The UK’s public sector debt to GDP ratio is very reasonable, when adjusted for the bond holdings of the Bank of England.

“Gilt yields – which are negative after inflation across the curve – are sending a very clear message that markets are not worrying about government debt. Policy makers may finally be seeing sense on fiscal policy.”

Lonergan suggests the Government could specify a process that allows the Bank of England should be given the power to credit household bank accounts.