ALEX BRUMMER: Challenge is going to be putting the borrowing and debt genie back in the bottle once it has been allowed to roam freely
Days of shocking economic data topped off by the record slump in retail sales by 5.1 per cent in March will inevitably put more power in the hands of those of us advocating an easing of lockdown with careful social distancing.
Earlier this week the governor of the Bank of England told the Daily Mail that easing lockdown too early would be an error.
My fear is that because the Government’s principal bail-out scheme for small enterprises has been so badly executed, swathes of firms and the capacity of the economy will be greatly denuded. Everyone will have their own examples of this.
A friend who built the UK’s premier air travel security consultancy told me that every contract has been cancelled, and even if he wanted a loan he couldn’t get one.
Warning: The governor of the Bank of England Andrew Bailey has said that easing lockdown too early would be an error
The boss of British Land, Chris Grigg, is fearful that unless his big construction contracts were up and running soon, the supply chain, consisting of smaller outfits, would be damaged.
It is vital that maximum government assistance – 100 per cent guarantees for smaller firms and preferably grants – and more are freely available.
At the Treasury where budgetary discipline is part of the DNA, this will be anathema. But responding to a medical crisis, with tens of thousands of lives at stake, is the priority.
Thinking ahead, the challenge is going to be putting the borrowing and debt genie back in the bottle once it has been allowed to roam freely. The scale of the task was outlined by Paul Johnson from the Institute for Fiscal Studies this week when he projected a deficit of £260 billion this year.
The Treasury is getting ahead of the technical challenge by raising £180 billion through sales of government debt over the next three months against planned fund raising of £156 billion for the whole year.
The record raised in the UK was after the financial crisis in 2009-10 when the bill shot up to £227.6 billion.
The scale of the borrowing need is not just defined by bigger spending. It also depends on output. The deeper the slump, the larger the hit to tax revenues.
Pay cuts mean less income for the Exchequer and the longer the commercial stoppage the less corporation tax and VAT.
Deferment of VAT has already led to a 70 per cent reduction in cash payments. Britain’s approach to borrowing and debt was more aggressive than most G7 rich nations after the financial crisis.
Rigorous restrictions saw spending fall by 6 per cent against 3.5 per cent in the eurozone and US as a percentage of output.
The remarkable thing is that even in the age of austerity, UK growth and employment did not stagnate. The public mood suggests austerity and the pain for household incomes would not be tolerated again.
Once it has been established that bigger government is tolerable over the short term, the case for extending the experiment will be strong.
After the pounding the care home sector and older people have taken from Covid-19, there will be no better moment to fix long-term social care.
Similarly, if the UK is to be the high-skilled, high-quality economy of Brexit dreams, then there might never be a better time to think about a ‘universal basic income’.
How then would these measures, and big investment in the future in the shape of HS2 and a splurge of government support for R&D be paid for? The IFS says higher taxation will be needed. But that is not the only answer.
After the Second World War, the UK’s national debt swelled to 259 per centof GDP. A combination of higher growth and some years of harrowing inflation brought it down to 43 per cent by 1980. Debt hovers in the 80s as a percentage of GDP and is heading towards 100 per cent or more.
The post-war correction took place before there was an independent Bank of England and a 2 per cent inflation target which more or less has held prices lower. So allowing inflation to erode debt is less likely.
The world has discovered in the last decade that there is more market tolerance for borrowing and debt, provided there is a gentle downward journey.
However, the fiscal and monetary boost – not just in the UK but worldwide – should help drive growth, employment and extra revenues. That, over time, will help pay for the Covid-19 shock and a more caring state.