Debt will soar, The government must just stay cool and focus on growth

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Debt will soar, The government must just stay cool and focus on growth

UK debt soars; Some in the Treasury are panicking about a debt pile set to hit 115% of GDP, but the chancellor – and most economists – agree that austerity is not the answer

UK debt soars is on course for a £300bn increase in government debt this year as the bills for keeping much of the economy mothballed during the coronavirus outbreak continue to mount.

Money to support businesses that have closed down make up the lion’s share, and the rest can be accounted for by increased welfare costs and the loss of billions of pounds to the exchequer in taxes that will never be paid.

The total debt pile, which has already hit 83% of GDP, or more than £2 trillion, will probably reach around 115% of national income (GDP) by next year.

In the wake of the 2008 financial crisis this level of debt was associated with profligate governments that had spent well beyond their means on white elephant infrastructure projects and wasteful subsidies. These were government debt levels to be avoided rather than emulated. Italy saw its debts increase beyond 130% of GDP, and Greece suffered a sudden increase in sovereign debts to 183% of GDP.

Now, the panic is much closer to home. A Treasury memo leaked last week showed that there is concern in some quarters at the escalating costs of fighting the coronavirus.

The alarm raised by the document’s anonymous authors was that, far from being a one-off financial hit, the coronavirus pandemic will cause the economy lasting harm and the debts built up during the crisis will, at least to some extent, recur in subsequent years.

Even the architects of austerity agree almost-zero borrowing costs and low inflation give the Treasury an opportunity.UK Debt will soar

Taking this argument a step further, the authors reverted to a Treasury mindset – one dating back hundreds of years that stresses the need for prudence and repeats the calls that followed 2008 for spending cuts and tax rises to begin the process of balancing the books as UK debt soars.

The memo argued that a public sector wage freeze could save about £6.5bn by 2023-24. The Conservative government’s “triple tax lock” promise not to raise income tax, national insurance or VAT, made before the election, would need to be ditched, along with its promise to protect the state pension.

There is another option though, one that George Osborne considered far too risky 10 years ago. That it is to live with a high level of government debt and focus on expanding the economy.

Thankfully, we have a chancellor who has suggested he would prefer enlarging the economy as the primary means of cutting the deficit.

Without hesitation, Sunak publicly rejected a return to austerity, telling parliament that the government’s “levelling-up” agenda would take priority. “Indeed I believe this can still be a critical part of how we get back to normal,” he said.

This will not be an easy task. In the short term, the government has to find a way to restart the economy without sparking a return of the disease. Then it must begin the task of identifying how public investment can support the industries that can accelerate quickly out of the crisis, and not just those that are in need of rescuing.

There will be many challenges, not least from a health and social care crisis that is likely to persist, even as both sectors attempt to get back to normal.

A levelling-up agenda that favours the regions and nations of the UK beyond London and south-east will take time, and will also need to focus on green growth so that the cuts in carbon emissions seen over the past few months are not thrown away.

One advantage the chancellor has over his predecessors is a consensus among economists of all persuasions that this time is different and the level of debt he finds himself with next year will be irrelevant.

Even the architects of post-2008 austerity agree that almost-zero borrowing costs and low inflation give the Treasury an opportunity to use the instruments of the state to drive growth while large parts of the private sector are fighting to recover. In the battle against coronavirus and its consequences, austerity must be off the table.

 

Source: The Guardian