If the multiplier in an economy works, then the pace and rate of GDP growth should increase rapidly.
Using borrowed money to increase the salaries of already relatively highly paid people may not have the same effect, as the extra salary may not be spent quickly.
But Hugh Gimber, chief market strategist at JP Morgan Asset Management says that despite the vast sums pumped into the economy, investors should not expect the multiplier to be high in the UK.
Mr Gimber says: “While a lot of money has been pumped into the economy, it has not delivered the traditional benefits of a stimulus. This is because while the money went in, we were told to not go out, we couldn’t spend it, so it didn’t multiply. I also think there are factors in the UK such as the ageing population that were already present and not really conducive to growth.
Mr Dinning says the borrowing and spending now may actually reduce the multiplier of future government spending.
He says: “The cash that has been spent now is to sort out an emergency. It is absolutely the right thing to do, but it also is likely to mean that there is less ability to borrow in future, so there would be less cash for spending on long-term projects in areas such as infrastructure that contribute positively to economic growth.
"So it may be the borrowing now [ultimately] lowers the longer-term growth rate in a way that is almost permanent.”
Mr Williams says other policy decisions taken over the past decade probably mean any multiplier effect will be much slower.
He said the policy of quantitative easing, whereby the Bank of England buys government debt and other bonds helps to keep borrowing costs low, also reduces the multiplier achieved on that debt.
This is because the bond buying programme causes asset prices to rise.
So, for example, in the decade after the global financial crisis, house prices in the UK rose much more quickly than did incomes.
This meant people seeking to get onto the housing ladder have to save more of their income and for longer, and that reduces the amount they can spend in the economy.
With central banks continuing to buy bonds as part of the Covid response, Mr Williams says the rise in asset prices is likely to continue, meaning those that have to save to buy assets will need to save more.
In this way, “even if the policy succeeds in getting money into people’s pockets, which is not something that happened after the global financial crisis, higher asset prices will have an impact on spending levels and growth.”
