It’s only an “options” document, but for someone in government to leak an actual Treasury assessment, predicting a potential £1.2trn cumulative budget deficit by 2025, there has to be a reason. And it’s pretty transparent: the Tory right, with the Telegraph in the vanguard, is waging a backroom campaign for the abrupt ending of the lockdown on both economic and libertarian grounds, and this is their ammunition.
But the leak should also be a wake-up call to the left. Sooner or later, austerity is coming, and the arguments in favour of it haunt the questions thrown at shadow ministers: how would Labour pay for all the furlough extensions, business support schemes and increased salaries for health workers, when the government looks close to penniless on all normal metrics?
It’s an argument Labour lost in 2019, and will lose again unless it develops – both at the level of the shadow cabinet and the wider movement – slogans with a greater level of sophistication than “tax the rich”.
There are three scenarios presented in the Treasury document: a V-shaped recovery with little long-term damage done; a “base case” under which the recovery is slower, and there is some permanent damage; and an L-shaped depression under which we face years of low or stagnant growth.
Compared to the £55bn annual deficit for 2020-21 predicted in the Budget, the new estimates are: a £209bn budget deficit in the best case, £337bn under the central scenario, and £516bn in the worst case. In all three scenarios the deficit falls, but in the L-shaped outcome it remains at around £160bn-£180bn a year until 2025. To put that into context: in the worst case, the UK’s debt pile – currently at £1.8trn – would rise by more than a further trillion in just five years.
On current methodology none of this is sustainable. Orthodox Treasury thinking would demand tax rises and spending cuts, and that’s what civil servants have offered. Rishi Sunak has already broken with more than 20 years of fiscal policy by accepting in principle a permanently higher debt-to-GDP ratio – implicitly over 100 per cent – so long as that ratio is stabilised.
The Treasury’s suggested austerity measures are not designed to “get the debt falling” or “balance the books over the cycle”; they are designed to stop the debt spiralling, and with it the cost of debt servicing. They call for combined tax rises and spending cuts amounting to as much as £30bn a year in the best case, and £90bn a year in the worst case.
We’re back to the same problem that David Cameron and George Osborne faced, and which the Blair/Brown administration created for itself in its first term: if you cut spending to balance the books, you destroy the long-term resilience of the public sector, flatline the economy in the process, and create a poisoned civil society, where everyone starts looking for scapegoats.
Leave aside the social injustice implicit in a pay-freeze for health and social care workers, or a general rise in VAT as people’s incomes plummet during the downturn, a new round of austerity would be macro-economic suicide. What matters about government debt is not its size: it’s the rate of interest paid on it, the real-terms cost of servicing that interest, and whether the economy is growing faster than the debt is rising.
Austerity solves none of these problems and should be rejected. And the ideological fight needs to start now: Sunak’s advisers warned that unless he gives a general signal of willingness to impose austerity within weeks, it could harm “investor confidence” and even trigger a 1976-style sovereign debt crisis, in which the private sector refuses to go on lending to the UK government.
The elements of an alternative are clear, and should be assembled rapidly by the opposition parties, but the task involves throwing aside the political caution that has been ingrained during the first weeks of Keir Starmer’s Labour leadership (and through the strategy of invisibility adopted by the Liberal Democrats).
The precondition is to stop treating the Bank of England as if it is independent. The Bank – like the US Federal Reserve – has led the way in combating the immediate impact of Covid-19. It is providing the government with an undisclosed overdraft via the “Ways and Means” account, and is acting as a lender of last resort with loans backed by the Treasury.
Any idea that monetary policy, in this situation, exists beyond the remit of politicians is self-defeating. Monetary policy – with £200bn extra in quantitative easing and a marked downgrade in the quality of debt accepted as collateral – stands at the centre of the British state’s response. Once you accept that – while maintaining formal independence – the government and the bank must work in lockstep, there are five clear proposals Labour could make and seek cross-party support for.
The first is: borrow what it takes and accept a permanently higher debt, and make it a matter of cross-party policy to stabilise the debt-to-GDP ratio around a new normal of around 120 per cent of GDP (compared to 80 per cent now). That would not leave the UK as an outlier within the G7 on current predictions.
The second is: stabilise debt interest payments through an overt policy of monetisation – that is, the Bank of England buying and holding government debt in perpetuity. That’s what it did during the Second World War, and it’s what most central banks are doing covertly, and the Bank of Japan overtly.
Yes, it’s effectively the government “lending to itself” by printing money, and in normal times it might be expected to stoke inflation. But with even the normally Panglossian Treasury modellers prepared to envisage an L-shaped depression, the fear of inflation should not be high. Indeed the Bank of England’s own researchers recently warned that, in the long term, we are in for a century of increasingly negative interest rates.
Some will argue that, given the scale of quantitative easing – £645bn – the Bank has the implicit option to monetise debt should interest payments get out of hand, so why be explicit? But it’s this possibility that is driving the arguments of the Tory right – we can’t afford to spend billions on interest payments in the future – so an alternative needs to be spelled out now.
The third proposal should be: aggressively tax wealth, high incomes and shut down the offshore tax havens. The knee-jerk left response of taxing the incomes of high-earners and raising corporation tax cannot fill a budgetary black hole of this size. We need to begin the argument for taxing wealth, in the form of second homes, speculative property empires, financial transactions and the pension pots of the very wealthy. We need to coerce Amazon, Facebook, Google, Apple and others into paying taxes proportionate to their UK turnover. And we need to send a letter to the governments of the Cayman Islands and other British Overseas Territories saying: sorry, the game’s up.
Fourth, there needs to be a programme of state-led investment to boost the rate of GDP growth. The Treasury document accepts there can be win-wins in the fiscal policy response, suggesting new carbon taxes. But the biggest win-win would be to use as much of the borrowed money as possible to launch a Green New Deal, funding a British Investment Bank out of taxpayers’ money to begin schemes needed to absorb the workforce of the hospitality and entertainment sector, which may never return to its former glory.
Fifth, in return for all the money being pumped into the private sector as loans – which will soon stand as liabilities on the state’s books – the government should take equivalent public ownership stakes, which can offset those liabilities with assets. It could take a stake in Virgin, the International Airlines Group, P&O and even major pub chains and SMEs if needed.
The objections will be many, and understandable, because the self-defeating policy of austerity flows – as in the 1920s – from the ideological attachment of some to an economic model that can no longer work. Even within the Labour Party there are just as many knee-jerk austerians as there were when Ramsay Macdonald and Philip Snowden ridiculed public spending and job creation schemes.
The strongest fear is the one the Treasury wonks present in stark terms: what if the global private sector ditches sterling gilts (as it did temporarily in a panic on 17-18 March)? The answer is, you announce a combined government and central bank policy to do “whatever it takes”, as Mario Draghi did as European Central Bank president during the eurozone crisis in 2012. That could include controls on the movement of capital, regulations to oblige British savers to lend to the government, and punitive taxes on speculators.
Alien as these sound, they were the underpinnings of the most successful three decades of growth the British economy has ever achieved, half of them under Tory rule.