The UK’s lack of preparation could make the next recession “unnecessarily painful”, a think tank has warned.
The Resolution Foundation, an organisation focused on improving the living standards of those with low or middle incomes, has said that the UK’s economic policy is not ready for the possibility of recession.
The think tank’s new Macroeconomic Policy Unit has published a report, titled Recession Ready?, examining the county’s monetary and fiscal policy, thought to be the most comprehensive since the financial crisis.
Traditionally, if a country is heading towards a recession, the central banks will deploy a policy known as quantitative easing. This is when money is injected into the economy through the purchase of government bonds in order to lower interest rates and encourage spending.
However, interest rates in the UK are currently at 0.75%, meaning there is little room for them to be lowered and so the Bank of England will not be able to offer the same level of support as the last recession.
Quantitative easing is used to prevent a recession becoming a depression. With the chance of a recession at its highest since 2007, the foundation warns that changes must be made as currently quantitative easing and interest rate cuts could only deliver a quarter of what’s needed during recession.
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Lack of UK action risking recession
In the report, the think tank highlights that the UK’s macroeconomic policy “has not kept pace” due to the fact that while other countries have been reviewing the tools available to their central banks, the UK has not.
It recommends that policy makers should go beyond making “tweaks to the existing toolkit” and should consider case for raising the Bank of England’s inflation target.
Furthermore, The Resolution Foundation has called for a greater focus on fiscal policy; the government’s means of influencing the country’s economy through tax rates and government spending. It also urges policy makers to ensure that “automatic stabilisers” such as tax and benefits, which help protect household income during economic downturn, are strengthened.
Finally, it highlights that a plan for the next recession is needed, despite the government likely being “fully consumed by Brexit and Budget planning in the coming months”.
James Smith, Research Director at the Resolution Foundation, said:
“As well as trying to deliver good times, we should be making sure we are able to respond effectively in bad times to minimise the pain of the next downturn. But the UK today is not recession ready.
“The Bank of England in particular used powerful policy tools to fight the last great recession – from slashing interest rates to injecting billions into the economy via quantitative easing. But ultra-low interest rates now mean these tools are blunted. Our plans for fighting the next downturn have not been sufficiently updated to recognise this reality.
“Now is the time to plan for the next recession – because the one thing we know for certain is that it will happen. The UK today faces the highest recession risk since the financial crisis, and lower income households are now more exposed to a downturn than they were back then.”