The United Kingdom’s debt levels have exceeded 100 per cent of GDP for the first time since 1961, and Rishi Sunak’s planned cuts and tax rises will barely make a dent – even if he is not forced to retract any of them, which is itself a big assumption.
There is nothing that Sunak announced today that will get the United Kingdom close to reducing its debts, and indeed in the short term many of his measures will add to it.
Should we be worried? Is the nation close to “maxing out its credit card”? The short answer is no. The UK has two ways it can spend more than it collects in tax revenues. The first is that it can borrow money on the international money markets. At the moment, governments, particularly those in developed economies, find this very easy, because private sector consumption is weak, private investment is weaker still, and the appetite among savers for risk is very low: as far as they are concerned, low-risk government debt is the only game in town. Because across the world interest rates are very low, the cost of servicing this debt is also incredibly low, and because the UK has long-maturing debts, it is well insulated against a change in interest rates. It is unlikely, in any case, that rates will rise by much in the short term.
Of course, if private sector spending and investment did increase, and if growth and inflation were to pick up, then all governments would face constraints on their ability to raise money in this way. However, this would be a good thing that would increase the government’s financial flexibility in a number of other ways. Growth and incomes would be up, which would boost tax revenues and make it politically easier to raise taxes. The huge degree of latitude that governments have for borrowing are the product of economic conditions that have many negative consequences, including on governments’ ability to fund their activities without borrowing.
Essentially, everyone – the International Monetary Fund, the Institute for Fiscal Studies, almost all economists – agrees that we do not at present need to worry about the deficit or government debt, and that government should be borrowing more, not just because present market conditions make it easy, but because they actively require someone to act as a haven for savers. Now is precisely the time for governments to spend: and the twin tasks of easing the coronavirus recession and facilitating the transition to a greener economy are ideal policy priorities.
Then there is the British government’s other way to fund its activities, which is using the lending capacities of our independent central bank to borrow money directly. The precise limits and drawbacks of this facility are contested – but it doesn’t matter, because we are very far from having to rely on it. Talk of the government having “maxed out the national credit card” is economically illiterate and should be avoided.