Over a mere four months this summer, the government borrowed £150bn, pushing the UK’s debt-GDP ratio over 100 per cent for the first time since the Chatterley trial, the Beatles’ first LP and (for Larkin) the dawn of sexual intercourse. Does the highest debt ratio in over half a century mean taxes must go up? On its own, absolutely not. At current long-term interest rates, we can finance the extra borrowing for well under £1bn a year—a rounding error.
The arguments made by George Osborne in 2010-11—that gilt markets would refuse to lend us money, and that a debt-GDP ratio over 90 per cent was a threshold for disaster—have been discredited. Most importantly, the idea that reducing the debt and deficit by cutting benefits and squeezing public services like the NHS and social care would leave us better prepared for a future crisis has proved the opposite of the truth—by hollowing out both the state and society, and reducing our economic and social resilience, the UK was left particularly vulnerable.
But it’s for precisely that reason that taxes need to go up after this crisis. Not to finance the one-off costs of the pandemic, but to reverse mistakes we made after the last crisis and ensure we’re prepared for the next. It’s a truism that the British would like a Scandinavian welfare state paid for by an American tax system. That doesn’t add up: over the next few decades, a richer, older society—as we will inevitably become—both can and should afford to spend more on health care for the elderly. And as well as more on the NHS and social care, structural economic shifts—from the aftermath of Covid-19 to decarbonisation—will mean more is needed for education and training. We don’t need higher taxes to pay for the virus; but the virus has exposed, economically, socially and politically, that we need them to build a better future.
Jonathan, you are so close to, yet so far from the truth. We share concern about the massive damage from austerity. We agree Osborne’s claims were false. We also agree that the pandemic stimulus, which will substantially increase public debt, will not necessitate tax increases in the immediate term. The Bank of England’s large bond purchases are effectively funding the deficits.
But you are wholly wrong that tax rates must rise to “pay” for the better future that we both want to see. Your argument rehearses the same logic that Osborne used to justify austerity, inasmuch as it assumes that large continuous deficits are unjustifiable in any circumstances. In fact, considerable scope remains for these into the future.
Context matters when assessing the fiscal position. Britain runs a consistent external deficit on its overall “balance of payments” with other countries, which means private domestic saving requires government deficits to support growth. The only question is how large they should be.
The initial austerity strategy relied on debt-fuelled consumer expenditure to pick up the slack as government contracted. But household debt continues to rise and the increasing dependence of poor families on credit cards and payday loans cannot continue. It is welcome that the government has realised it must spend significantly more (“levelling up” etc), if only because it hopes to retain political advantage. The rising public debt resulting from all this is no issue; we can think of it as non-government wealth. Despite the protestations of anti-deficit ideologues, deficits not only stimulate national incomes but add to private financial wealth. Investors buy and sell public bonds depending on ambitions for their portfolio, just like any other asset.
The government can always meet sterling liabilities because it issues the currency; the real question is whether deficits will provoke inflation in the medium term—I think not, as there are ample idle resources that can be brought back into productive use. If Britain is serious about fixing the climate crisis, there might need to be even higher deficits, and perhaps these would risk inflation. Tax increases would be one option in that scenario. But these would not be to fund government spending; just to reduce private purchasing power. Either way, Britain will have to run elevated deficits for some years. Tax hikes are not a necessity, and I am puzzled that you think they are.
If the government is to spend more than it taxes, it must borrow or print the rest. That’s arithmetic, not economics. In current circumstances—with demand suppressed, consumer spending low and businesses understandably reluctant to invest—it’s easy for it to do so. And it’s necessary. Essentially, what’s happening is that the government is borrowing, indirectly, by tapping current saving by people like me, out of incomes that have held up, and channelling that money to people whose employer can no longer afford to pay them. That maintains demand and reduces hardship.
But you’re wrong to suggest this is a desirable way of redistributing income or wealth, still less financing public services, in the long term. Sooner or later I’ll want to spend my extra money. Confidence will return and business will invest. Then the government faces a choice. It can continue to borrow and print indefinitely, but this will lead to higher debt and interest payments on that debt.
“Higher taxes can help ensure we are prepared for the next crisis”
You don’t address the consequences: the higher interest rates (that arise as the private and public sectors compete for the available pool of savings) which will deter private investment; the higher inflation, unleashed as money incomes and asset prices race ahead of real output; and a fall in the pound, as its value is expected to shrink relative to other currencies. All this will depress real incomes, lower living standards and, over time, growth. I agree that we don’t know exactly when these impacts will manifest. But we can’t just pretend they don’t exist.
What’s the alternative? We’re agreed more spending cuts would be a disaster, so that leaves tax rises. These will reduce disposable incomes—especially of the better off—and private sector demand, and thereby free the Bank of England from worrying about inflation expectations or the level of sterling, so it can concentrate on stabilising the economy with short-term interest rates. The resulting distribution of incomes will be more equitable and efficient. Borrowing and printing to finance government spending means arbitrary redistribution via inflation, rather than democratically chosen and progressive taxation. I know which I’d prefer.
(iii) Defizit handiagoak
You are rehearsing simplistic textbook narratives. The government is not borrowing from people “whose incomes have held up,” but wealth holders seeking risk-free bonds. Focusing on what the government owes in isolation distracts from the fact that public debt is private wealth, and interest payments private income.
Suppose those with savings do “sooner or later spend.” I don’t know why they’d suddenly liquidate their wealth, but if they did, sales and employment would rise, tax revenue would automatically grow and the deficit contract. No rate hike would be needed.
Would the shrinking deficit that then resulted be appropriate? The context suggests not. The UK external deficit drains spending from the economy, so sizeable fiscal deficits are required to support the private incomes and keep private debt manageable for households and firms. Your assertion that “budgets” eventually have to balance ignores the history, which teaches us that the conditions where a balance would be appropriate are unlikely to arise.
“Larger deficits can support private saving—and repair the damage from austerity”
So the choice is over debt-issuance or not. You wrongly characterise the alternative as “printing,” triggering panic for those who have had Weimar and Zimbabwean hyperinflation shoved down their throats. But that offers a misleading picture of how government spending enters the economy. Whether it’s in surplus or deficit, the government spends by instructing Bank of England operatives to type numbers into bank accounts. Your “arithmetic” implies some inherent constraint on government spending. In truth, it is nothing more than accounting for the currency entering (spending) or being drained from (tax or debt issuance) the system. Indeed, thanks to the BoE’s recently-extended Ways and Means account, which facilitates government overdrafts, the Bank can already facilitate Treasury spending without any debt issuance.
You parrot the standard mantra: deficits push up interest rates and inflation. So why has Japan not endured skyrocketing prices or rates after 30 years of large and ongoing deficits matched by a massive Bank of Japan debt purchasing programme? And between March and mid-August, the Bank of England purchased gilts worth £241bn without disruption. In sum, central banks can maintain rates wherever they choose, while effectively funding fiscal deficits. Scaremongering about inflation has no credibility. There is no sound basis for tax hikes.
(iv) Paradigma berri baterantz
Let’s look at what’s actually going on in the “real world.” I’m saving more and so are people like me. The data shows money held in banks and building society deposits has soared. And yes, we are lending to the government, indirectly, because the banking sector has effectively put that money on deposit at the Bank of England—and the Bank, in turn, has bought government debt. The net result is more such debt—and more money in bank accounts that is available for people to withdraw using cash machines or debit cards. Effectively, the government is borrowing and printing money.
Your view seems to be that this can go on forever. But the reason we’re not spending is the pandemic. As the country recovers, so will investment and spending. That will push up tax revenue—and eliminate much of the deficit. But, as I say, it won’t bring it down to a sustainable level, because we need to spend more on health and benefits—and those needs will grow over time. Your view is that we can deal with this without raising taxes, simply by carrying on with our inadequate level of tax, as these spending pressures grow.
That would be nice, but it doesn’t add up. You’re right that “public debt is private wealth.” And if public debt spirals ever upward, then so does private wealth. But ultimately households and businesses don’t just want to hold ever-increasing wealth—they want to spend, consume and invest. If they want to do that at the same time that the state is also consuming and investing more of national income, then the result must be higher long-term interest rates and inflation.
Somebody has to lose. The choice is whether we determine democratically who can afford to pay via taxation, or do it randomly, via higher inflation, a lower pound and higher long-term interest rates.
Like all mainstream economists, you summon the spectre of “higher inflation, a lower pound and higher long-term interest rates.” Why? The bible—sorry, textbook—tells you so! But this conjuring has run its course: it cannot explain the last three decades in Japan, or more recent experience in Europe, the US and, dare I say it, the UK.
Before the pandemic, the economy was struggling. Growth was well below trend. Investment had stalled. And real wages were stagnant. The decade of austerity had undermined public infrastructure and public services were in decline. That already told me that there was considerable scope for more spending without triggering inflation. The pandemic has reinforced that conclusion.
And the context—stubborn external deficits and unsustainable household debt—tells me there is a necessity for much higher, continuous public deficits to support higher private savings and repair the crumbling infrastructure left by austerity. You have studiously ignored the importance of that.
You are correct that people are saving more at present. But Britain needs them to save still more if the private sector is to reduce its debt. The Bank doesn’t conceal that it is likely to keep rates low for the foreseeable. Should the government seek to command a far bigger share of productive resources—say, for a green transition—then, yes, perhaps tax rises would have a role in offsetting the extra spending and warding off inflation. But, at present, I don’t perceive either main party articulating anything that would push deficits to the inflation ceiling. The hikes you advocate only make sense in your fictional world. We need a new paradigm based on reality.