The UKs high levels of public spending have worsened the downturn in the private sector, according to a new study* from the Institute of Economic Affairs.
The research shows how the government's ballooning deficit has worked against the Bank of England's Quantitative Easing (QE) programme, preventing it from increasing private sector lending and economic activity.
The main focus of the research examines the relationship between new measures of the money supply such as M4X** and national income, in order to inform the debate about QE, but it is the side effect of the impact of government borrowing on the economy that is particularly alarming.
High levels of public borrowing (about 14% of non-oil GDP over the next few years) are countering the Bank of Englands effort to stabilise the economy. The analysis suggests that QE has essentially been "crowded out" by government borrowing. With a balanced budget but continued QE, gilts yields could be 3.5% lower, boosting