Debtphobia must not undermine the Conservative response to COVID-19
Updated: May 13, 2020
"We will support jobs, we will support incomes, we will support businesses, and we will help you protect your loved ones. We will do whatever it takes." ~ Chancellor Rishi Sunak, 17th March 2020
“Despite the significant economic interventions we have put in place, we will not be able to protect every single job or save every single business,” ~ Chancellor Rishi Sunak, 24th March 2020
This Conservative government is in the midst of another major economic crisis - less than a decade since it took office in the wake of the financial crisis. The early indications are that this economic crisis will be greater than the recession of a decade ago.
The government's initial response started off very well. Grants for small businesses, NI holidays, government-backed loans and a Coronavirus Job Retention Scheme to limit the increase in unemployment. But it seems like HM Treasury has scared itself with the boldness of its own response. In the space of a week, the Chancellor's rhetoric changed decisively away from "whatever it takes" to "we cannot help everyone".
It is important to ask why this is. After all, it was only a month ago that the Chancellor was telling the BBC that with debt interest rates at a 30 year low, now was the right time to borrow. If that was the case then, surely it is even more the case now as the government is in the economic fight of its life?
Naturally, there will be many Conservatives that are concerned about debt and deficit spending. There is a growing worry that ten years after the financial crisis, we are still running a budget deficit, even if that is mostly to fund investment rather than to fund current spending. But that is surely an issue for after the crisis, not during it? Moreover, as the Chancellor himself has said, the UK cannot only afford to pay back debt if it's "productive capacity" remained in tact. The irony of not borrowing today, to undermine our ability to pay back debt in the future, is wrongheaded.
We also need to challenge the Hayekian argument that somehow economic shocks redistribute from the bad businesses to the good. Of course, like any good ideologue, many liberals would argue that this approach has never been properly tried. But there is no evidence that recessions really do distribute resources that way. Good businesses, with good prospects and ideas are often lost in the midst of economic distress.
Everything is pointing in the direction that although the initial Treasury response was bold, it is still not enough. Worse, aspects of the plan are getting lost in the weeds of delivery. For example, the CBILS loans are stuck in the banks, with concerns that hundreds of thousands of small businesses could run out of cash in the coming weeks. Unemployment is now estimate to be above 2m for a couple of years, which will act like a huge sagging weight on the UK's economic recovery and will undermine the only real economic success of the past decade - the jobs boom.
Markets remain unfazed by the UK's borrowing. Gilt rates remain at record lows. The reason that they do this is partly because of economic uncertainty, but also because of the UK's history as a responsible payer of debt. A quick glance at the history books show that numerous times, the UK has spent big but paid it back. This isn't to make light of debt, but it puts our current situation in context. The UK cannot afford not to borrow, and it must borrow, in order to protect the UK's productive capacity. The key with debt, as any business will tell you, is not the amount but the ability to pay it back. The UK can afford to pay it back, and will pay it back. Conservatives should look at that history and take confidence from it.
The time to act really is now. Fresh analysis from the National Institute for Economic and Social Research (NEISR) has found that bolder action to reduce business failures (such as through 100% government backed loans) would be repaid in tax revenues swiftly, potentially within less than one year. Every pound spent today, will generate a return of around £5 in the future be retaining the UK's productive capacity. Interestingly, they include non-profits (such as charities) in this midst, not just traditional SMEs.
The risk is that the combined forces of Treasury orthodoxy and Conservative "debtphobia" will act to suppress necessary action. Not only would this lead to the unnecessary loss of businesses and damage to livelihoods, but it would undermine the Prime Minister's efforts to paint this as a "different kind" of Conservative Party.
We are at risk of seeing another wasted decade, with the Conservatives once again spending years on an economic recovery job that could have been made easier if they had showed more flexibility at the beginning. It is up to the Chancellor and the Prime Minister to bring their vision to bear, and prevent their "One Nation" principles being undermined by irrational fear of borrowing.