One of the biggest scandals involving banks do more to boost Britain’s moribund economy than do government incentives introduced by channeling money directly to consumers of credit institutions which refuse to finance the economy.
The five largest U.K banks have set aside nine billion British pounds ($14 billion) to cover claims for return of funds to customers to whom banks have sold credit insurance that was not required or could not be used, writes the Financial Times. This is one of the most expensive scandals involving customers in British history. Credit institutions already paid 4.8 billion pounds before the end of March, just putting “money from heaven” in the hands of those who definitely will spend it.
“When I heard that I will receive over 2,000 pounds in compensation, I hired builders to repair the roof. I’ll use the remainder of the money to go in September in Greece,” said Elaine Overten, a pensioner receiving compensation for payments made for ten years.
The refund has the same effect as tax cuts, said Jonathan Portes, director of the National Institute for Economic and Social Research. “If you really want to grow demand, the most obvious solution is to reduce taxes and increase spending,” he said.
In a healthy economy, the injection of funds equivalent to 1% of GDP or 15 billion pounds, the estimated amount of the compensation, could bring in a year a contribution of 0.7% to the GDP. In recession, the effect is even greater, said Simon Kirby, an analyst at the same institute.
Government’s project to stimulate demand has not yet noticeable effects. When the Office for Budget Responsibility has changed in March, the economic growth estimate for this year, it assumed that the compensation will increase household income. The review did not take into account the various initiatives of the government.
The initiatives include encouraging pension funds to invest up to 20 billion pounds in domestic infrastructure projects. Government now has a more modest target, create a fund of two billion pounds to start the search of investments early next year. Other measures include guarantees to encourage banks to finance small businesses at low interest rates, but authorities have not given clear data on the volume of lending to date.
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