The UK’s national debt has now reached a level that will make fiscal conservatives tremble with fear: 100.9 per cent of GDP (£1.95trn). In other words, total borrowing now exceeds the size of the world’s sixth-largest economy. Not since 1963 has Britain’s financial black hole been so large.
Borrowing over the first two months of this financial year (April and May) was £103.7bn, and the Office for Budget Responsibility has forecast a deficit of £298.4bn for 2020 – the largest since the Second World War. The combined impact of the lockdown and higher government spending (such as on the furlough scheme) has destroyed any remaining Conservative ambition to “balance the books”.
In the wake of the 2008 financial crisis, the UK’s response to higher debt was austerity – and some have already called for a repeat. George Osborne, the original author of the cuts programme, has warned of the need for a future “period of retrenchment”.
But, as in 2010, alternatives are available to the UK. Though government borrowing has rarely been higher, it has also rarely been cheaper. Indeed, such is the demand for UK debt from investors that the government has sold bonds at negative interest rates. In other words, investors are paying the British government to take their money.
The reason is that there are few safer havens than UK bonds. Unlike the Eurozone countries, Britain retains its own currency and the ultimate magic money tree: the Bank of England. The central bank has already taken the emergency step of creating (or “printing”) new money in order to directly finance government spending. In such circumstances, there is no need for the government to deny essential support for living standards and public services.
The cuts imposed from 2010 onwards did grave damage to the UK’s social fabric. Rough sleeping in England has increased by 165 per cent since 2010; life expectancy in the UK has stalled for the first time in more than 100 years; and the number of people in poverty in working families has reached a record high.
But as the UK seeks to manage its debts, there are alternatives to punitive cuts, including progressive tax rises and growth through investment. Corporation tax in the UK was 28 per cent in 2010 but has since been reduced to 19 per cent, the lowest rate in the G20. New or revised property and land taxes could further raise revenue – council tax bands, for example, have not been revised since 1991. The top rate of income tax could be increased from 45p, a measure that has precedent in times of crisis – both the UK and the US had top rates of over 90 per cent during the Second World War.
In view of recent debates, it would be easy to assume that austerity is the only means by which to reduce the national debt. But previous governments also depended heavily on growth (to maximise tax revenue) and inflation (to reduce the cost of servicing debt). After the Second World War, the national debt stood at 250 per cent of GDP, but it was steadily eroded through a “golden age” of growth, falling to 45 per cent by 1973.
As J M Keynes was fond of remarking, look after unemployment and the Budget will look after itself. And though the UK is forecast to suffer the largest economic recession of any major country, it is also forecast to enjoy the fastest recovery.
The Covid-19 pandemic has dealt a grievous blow to the UK’s economy and society. But there is no need for the government to compound the damage through reckless austerity.