Remember the phoney lockdown, when social distancing meant working on your laptop in a coffee bar? Those days seem distant now. But we’re still, effectively, in the phoney fiscal stimulus.
On paper, the Chancellor Rishi Sunak has been forced to commit taxpayers’ money to the tune of 15 to 18 per cent of GDP to help businesses and households through a period of cratering demand. But it’s not working fast enough. Independent forecasters believe the UK’s GDP will contract by double digits in the second quarter of 2020.
For the whole of 2020, predictions currently range between slumps of 5 per cent and 8 per cent of GDP. To achieve a so-called V-shaped recovery, where most sectors would bounce back in 2021, the government needs to a) save businesses from insolvency now, and b) reignite growth once the lockdown ends.
But Sunak’s stimulus has been misdesigned – and the reasons, as always, are political. According to an analysis by the Bruegel think tank, while Sunak pledged £330bn in soft loans to businesses – totalling 15 per cent of GDP – the actual amount of money being offered as direct state spending is as little as 1.4 per cent of GDP, while the same amount is being pumped in through deferring income tax and VAT payments.
This division between immediate spending, deferred taxes and soft loans differs wildly between major nations – with Trump’s US among the forerunners in hard upfront spending, at 5.5 per cent of GDP. The UK is not alone in its preference for placing much of the strain on a soft loans programme and the political reasons are clear: soft loans don’t show up as a government deficit immediately, and nor do they need to be classified as debts.
To understand why it matters, think about the effect of your own behaviour of the following three offers: “Here’s a ten pound note, gratis”; “Don’t pay me back that tenner you owe me”; and “I can help your bank to maybe lend you £100, provided you fill in a form that takes four hours to complete”. When you can’t pay the rent, the £20 upfront matters far more than the bank loan, which you can’t imagine ever paying back.
The results have been predictable. The take-up of government soft loans to small businesses (known as Coronavirus Business Interruption Loan Scheme) has been paltry: just 2,500 small companies have had loans approved over the past three weeks, to the tune of just £450m, and the actual money delivered is significantly less than that. A British Chambers of Commerce survey released on 8 April found that just 1 per cent of respondents had managed to access the scheme.
Sixteen per cent of small-to-medium sized businesses surveyed by the British Chambers of Commerce say they have less than a month’s cash left, while a third were planning to furlough a majority of their workforce within seven days. Though the government has reformed the scheme, after banks tried to force small business owners to pledge their homes as collateral, many businesses complain they can’t even get through to a real person for advice and help.
Compare that to a parallel US scheme: Trump has offered to underwrite 100 per cent of the loans the US Treasury is offering small businesses and – critically – to turn it into a grant (ie, free money) if they retain their staff. The fate of the UK economy depends on these details. But we’re not just dealing with slowness, nitpicking and typical British incompetence.
The great fear lying behind the phoney fiscal stimulus is that, done right, it will blow away two delusions fundamental to the free-market ideology that has ruled us for 40 years: that borrowing is bad, and that the central bank is independent.
With the pre-Covid budget decisions adding around £200bn to UK debt over the next five years, and the emergency measures at least that much again, what matters is whether the economy grows as a result. Government debt, currently at 79.1 per cent of GDP, was forecast to fall to 75 per cent thanks to generous assumptions about post-Brexit growth. But there is now a danger that the economy does not grow – and we end up with debts approaching 100 per cent of GDP.
The left’s position on this should be: so what? At the last general election John McDonnell wanted to borrow up to £400bn over the next decade to rebuild the UK’s infrastructure and decarbonise its energy system. Within weeks the government has had to commit a similar sum just to keep Britain’s economy afloat.
The legitimate fear among mainstream economists is not that the government “goes bust”: it is that interest payments consume an ever larger part of the budget, while deflation – negative growth – means the value of everyone’s debts rise, even as the prospect of paying them back recedes. But for a country like the UK, with its own currency, those fears are meaningless.
As the former US Federal Reserve head Ben Bernanke put it – when fear of deflation stalked the world in 2004 – “The US government has a technology, called a printing press… that allows it to produce as many US dollars as it wishes at essentially no cost.” Well, so does Britain, in the shape of the Bank of England.
The Bank has already acted decisively to stop an incipient run on the pound by creating £200bn of new money and spending it immediately on both UK government bonds and corporate bonds. Whereas normally quantitative easing is used indirectly, to coerce wary investors into taking risks, the 19 March intervention was much more direct. For the first time we saw the bank trying to manage the so-called “yield curve” – the difference between long and short-term interest rates – a tactic that has been pursued more openly and consistently in Japan and Australia.
But now there are calls for the Bank to go further: to create billions of pounds more and directly purchase the debts being issued by the government. Known as “monetisation”, this is now being advocated by serious establishment figures, including Charlie Bean, the former deputy governor of the Bank, and this week by the editorial board of the Financial Times.
Labour should, without hesitation, support these calls. But I doubt it will. The Labour tradition is historically weak on monetary policy, preferring to meet all crises with fiscal policy alone. It’s a blindness dating back famously to 1931, when Ramsay MacDonald’s government collapsed because, as one minister put it later, “we didn’t know” that public spending cuts could be avoided by leaving the gold standard.
Even John McDonnell, who thought about tweaking the Bank’s remit to increase productivity, was never prepared to publicly countenance a strategy of monetisation. But monetisation is going to be needed. The most obvious form of it is clean and simple: Sunak needs to switch emphasis from the soft loans scheme to hard, upfront direct spending, preferably the kind of universal basic income Spain is trying to introduce.
That might generate hundreds of billions of extra borrowing. But instead of raising that money on the bond markets, the Treasury should go directly to the Bank, which would simply create the new money overnight.
There will be pearl-clutching over the danger of hyperinflation, but forget it. We are in a deeply stagnant and deflationary epoch. The real reason Bank officials are opposed to this is because they fear it would blow away the illusion of “central bank independence”. It would create what they call “fiscal dominance” – removing the Bank’s ability to counteract the tax and spend policies of a left-wing government (as Mervyn King sought to do with Gordon Brown in 2009).
But central bank independence is just a game, and so is inflation targeting. It was created at the height of the neoliberal era to create downward pressure on wages and on public spending.
Like all ideologies, the rituals and holy aura around central bank independence are there to mask a real social relationship. The modern central bank is, ultimately, a backstop against democracy. Should the population elect a government that wants to tax, borrow and spend, or to raise the wage share of the economy and shrink the profit share, the Bank has the power to override that democratic decision.
Yet when it comes to saving capitalism, the central banks will always break their own rules. I do not subscribe to so-called Modern Monetary Theory, which asserts at root that the state creates economic growth. But its policy remedies at this stage of the crisis are correct: borrow money to stimulate demand and let the central bank buy up the debt created.
And that is because the alternative is bleak. Faced with a national debt of 100 per cent of GDP, the neoliberal orthodoxy demands immediate and harsh austerity. There are already voices clamouring for it.
If we follow the austerians’ advice we will be forced to inflict yet another decade of spending cuts on the NHS, police service, local government and defence; and to let wages stagnate – as George Osborne and David Cameron did. I do not think the UK population will tolerate that – not after seeing what it’s done to the capacity of the NHS, and after seeing low-paid nurses, bus drivers and care workers forced to go into battle with this disease without vital Personal Protective Equipment.
So the ideological battle against austerity has to begin now. Labour can be – and has already become – the champion of renters, small businesses and workers. But the debts racked up today, to save the economy, will become tomorrow’s excuse for avoiding the investment we need to rebuild our infrastructure, reindustrialise our country and decarbonise our energy system.
Unless Labour learns to think in both fiscal and monetary dimensions, the danger is it will get outflanked to the left by the Financial Times.