How will we pay for the COVID debt? The honest answer is that we won’t.
Following the Spending Review we have had predictable coverage in the media about the record levels of debt and the deficit that has been incurred. It makes for dramatic television and radio for presenters to talk in dark tones about “debt crisis” and quote hundreds of billions of borrowing. The question that is always asked is “How will we pay for this?” or even more economically illiterately, “When will we pay for this?”, The insinuation being that the UK is like a medieval monarch perpetually on the brink of bankruptcy.
The truth is that we (those of us alive today and our immediate descendants) won’t pay for this. So rather than wasting energy pretending that we will (or that we have to), we should focus on the real issue: how are we going to substantially grow the UK economy over the next few decades?
"The vast majority of people who lived through the [Great War], fought in the war and were born in the decades after the war never lived to see [the debt] repaid."
People have spoken about the debt incurred due to COVID-19 being equivalent to war. The sharp increase in spending is certainly equivalent to wartime. But people do not seem to make the link to how we paid off wartime debts with COVID debt. Debt incurred by the Great War was not 'paid off' until 2015 - a hundred years later. The vast majority of people who lived through the war, fought in the war and were born in the decades after the war never lived to see it repaid. The Second World War debt has not been “paid off”, the UK actually kept issuing debt to meet interest payments in the years after the war. So our great grandparents and grandparents did not pay for their debts. As the OBR has demonstrated, nominal debt went up after the Second World War, what changed was the size of our economy and our ability to pay. Growth and inflation made the debts incurred manageable.
We often talk about debt as an imposition on our children. David Cameron famously ran a poster featuring a new born baby with the words: “Dad’s Nose. Mum’s Eyes. Gordon Brown’s Debt.” It is true that it would be better for future generations if they had no debt. No one should borrow if it is unnecessary to do so. But borrowing can have benefits, debt is a historic legacy that we have to deal with and state debt is a integral feature of our financial system (as a safe asset class) and it is never going away.
Once you accept this point two things present themselves. Firstly, the aim is not to “pay back the debt” but manage the debt. This means ensuring that debt payments are kept as low as possible as a percentage of the UK Budget and national output. The good news there, much underreported, is that debt repayment is at historic lows and the whole trend is towards lower levels of debt repayments over recent decades.
"The fact is that we we have breathing space to take stock of our current situation, invest and fund a programme to grow our economy for the future."
The reasons for this downward trend are multifaceted, but the debt worriers show their own hand when they talk about rises in interest rates making debt repayment “unsustainable”. Allister Heath, in today’s Daily Telegraph, worries that if interest rates rose sharply by 3%, the debt repayment would jump by £36bn. That sounds like a lot of money and it is, but it is only 4% of the total UK Budget. Hardly bankruptcy. This is important context. The fact is that we we have breathing space to take stock of our current situation, invest and fund a programme to grow our economy for the future.
This relates to the second key point: managing debt requires growth and long term productivity increases to service. The real crime against our successors is not the debt, but not having a plan to grow the economy sustainably so that they can pay it down. Here, unfortunately, the UK has form. So often we delay investment in infrastructure, targeted reforms or tax cuts or public services which could boost economic growth in the future because of concerns about debt or borrowing. Our Victorian sensibilities on debt are holding us back from making the right decisions.
"Here, unfortunately, the UK has form. So often we delay investment in infrastructure, targeted reforms or tax cuts or public services which could boost economic growth in the future because of concerns about debt or borrowing. Our Victorian sensibilities on debt are holding us back from making the right decisions."
Take the issue of “levelling up”. We know that the UK is economically unequal and large parts of the country are not performing as well as they could. If we could raise their economic performance, we would have a stronger economy. Yet we are not investing significant sums in levelling up, because we are worried about debt. But it will be the lack of levelling up and a sluggish economic performance within our regions that will make the debt unsustainable - not the borrowing itself.
Allister Heath is right when he says that the problem of the deficit is also a problem of growth and competitiveness. We can argue and debate about the best way to stimulate growth and competitiveness. Some, like Allister, will say that the state is poor at picking winners and investing in the right structures. Others, say Mariana Mazzucato, will say that the state has a central role to play and has a good track record of success. This author has argued that reforming business is central to raising performance. Whatever the view, this is the debate we should have. And if it requires investment or tax cuts or spending of whatever kind to deliver it, we should not use unfounded concerns about the deficit and debt to scare us off. Proposals should be judged on their merits.
This should not be taken as some Reaganite dismissal of debt and deficits. They do not take care of themselves. They need to be managed. If there is “waste” or sensible savings to be made, they should be made. But let's not waste our time discussing who pays for debts or when. The answer is that we won't pay for this debt off for hundreds of years potentially, if we ever do so.
"The challenge Conservatives face is talking themselves into a corner. Many believe it is good to talk up the deficit and debt because it creates a dividing line with Labour. It has become a safety blanket for the Party and prevented it from generating a thorough programme of economic reform."
The challenge Conservatives face is talking themselves into a corner. Many believe it is good to talk up the deficit and debt because it creates a dividing line with Labour. It has become a safety blanket for the Party and prevented it from generating a thorough programme of economic reform. We have already seen these unfounded concerns about the cost of support leading to a far too early termination of the Furlough Scheme which backfired economically and politically. Now there is a danger that debtphobia it will kill off the levelling up agenda before it has even begun.
If the Conservative Party's economic agenda is driven by fear of debts and deficits, it will not last much longer in office. An ambitious and positive agenda of economic renewal is essential. The Spending Review did not have a lot to say on this, and developing this agenda must be the policy priority of the winter.
It is this lack of a comprehensive programme for growth which we should all be worried about not, as some want us to believe, the deficit.