Nicola Sturgeon, Rishi Sunak, Boris Johnson: weep no more as government debt and deficits climb off the scale. In fact, for years we have been needlessly worrying. Magic Money Trees (MMT) have not just sprouted but are to be hailed as the life-saving product of another MMT – modern monetary theory. It now has governments and central banks across the world in thrall.
In the election last year, Magic Money Trees were mocked as fantasies of left-wing economics: Jeremy Corbyn’s allotment was groaning with them. Under the canopy of MMT we needn’t worry about raising taxes to pay off the deficit because deficits no longer matter: You can simply print more money to pay for government spending.
With the economic havoc wrought by Covid-19, modern monetary theory is now all the rage among policy-makers. Governments faced with a collapse in revenues and resort to vast state spending have been able to print as much money as required to spend and meet budget commitments.
Here in the UK, total government debt has soared to £2.63 trillion, and the annual budget deficit is now nudging £350 billion. State support measures since the March budget to combat the pandemic slump in revenues amount to nearly £159 billion – this excluding the recently announced “plan for jobs” comprising a £30 billion package of support measures including a job retention bonus, a “kickstart scheme”, a reduced VAT rate for specific industries, a £5.6 billion package of infrastructure spending, and reduced stamp duty/land tax.
The government is being kept afloat by a fantastic magic circle of ‘round-tripping’: money is printed by the Bank of England to finance the spending which then mops up the debt left behind which keeps borrowing rates deceptively low.
Why on Earth did we not hit on this magic merry-go-round before? Well, we did, though not on such a gigantic scale. What could possibly go wrong now?
Two deadly threats are faced by our Magic Money Tree. One is the silent accumulation of contingent bad debt and the onset of a massive debt default.
According to an Office for Budget Responsibility (OBR) scenario, under which the economy does not regain its pre-crisis peak until 2022, the state loses £16 billion on bounce-back loans, £900 million on business interruption loans on which there is an 80 per cent state guarantee and £1.7 billion in trade credit insurance. In its worst-case scenario, in which it takes four years to recover, bounce-back losses reach £31.8 billion.
The second is that there are limits to this extraordinary period of government largesse. New Bank of England governor Andrew Bailey has made clear that the government cannot count on carte blanche support for the avalanche of spending measures announced in recent months. The bank’s legitimate function is to stabilise the UK economy in the face of Covid-19 consequentials, not to pick up the tab for every item the UK Government chooses to spend.
“At no point”, he recently declared, “have we thought that our job was just to finance whatever debts the government issue... that’s not part of our objectives. I’ll be absolutely blunt about that.”
This immediately casts doubt on whether the bank will finance the government’s “levelling up” agenda, or guaranteed apprenticeships, or free school meals over the summer – these are surely welfare policies, not Covid ones.
The government is now understood to be pondering action on two fronts: first, an increase and/or extension of capital gains tax to cover our currently exempted main residential home, and second, enabling companies to convert state loans into equity stakes in their business, similar to recent proposals in Scotland by former Tesco bank chief Benny Higgins.
OBR chief Richard Hughes called this week for a student loan-style system where debt outstanding after a set timeframe is cancelled. The government guarantees could be converted into such a system with companies paying a share of their revenues over several years. Those who have still not paid the loans back over a set period could have the rest written off. He suggested that 5 per cent of companies’ revenues could be taken each year.
That would be an astonishing development for a Conservative government. But then everything, since it agreed on an infrastructure spending spree even before the pandemic struck, has been astonishing. Boris Johnson has already broken previous constraints on government debt and borrowing.
Thus will the Magic Money Tree come to devour not just Conservative orthodoxy but the very basics of financial stability as we have come to know them.
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