The pandemic has landed treasuries everywhere with whacking great overdrafts—in the UK alone the figure is £2 trillion. Debt denialism is dangerous, but panicked prudence is self-defeating. There’s no easy escapeby Barry Eichengreen / October 2, 2020 / Leave a comment
Covid-19 changes everything, or so it is said. It is certainly true of public finances, which have been drastically changed and not for the better. The United States entered the Covid crisis with federal government debt held by the public of 80 per cent of GDP, already twice what it was in 2008 before the financial crisis blew a hole in the books. This debt will now approach 100 per cent of GDP by the end of 2020, according to the country’s bipartisan fiscal watchdog, the Congressional Budget Office. It will reach 110 per cent of GDP by the end of the decade, assuming that nothing more is done, and continue rising.
In the UK, public sector net debt hit £2 trillion this summer for the first time in history. According to the Office for Budget Responsibility, net debt was up by 20 per cent of GDP on a year earlier, to 100.5 per cent, more than keeping pace with the US. As for the next few years, even before the Covid crisis hit, public debts were set to grow—the Office’s latest fiscal forecast, which dates from March and scarcely allowed for the virus, envisaged a rise of 15 per cent over the coming five years. The crisis will now mean slower growth and even heavier debts. So how worried should we be? And what are the prospects for repairing the damage?
We know how the last great shock to hit the public finances was handled in the UK: by the austerity programme of the Cameron government, which was heavily tilted towards retrenchment in public expenditure, with taxation playing only a supporting role. This time, with public services already palpably frail, Chancellor Rishi Sunak, former investment banker though he is, was said to be contemplating tax rises to “repay” the government’s coronavirus support in his autumn Budget. In the end, as a second wave hit, he abruptly cancelled the event, and substituted an emergency statement which introduced a new wage subsidy scheme and extended one temporary tax cut, all told loosening the purse strings by an estimated £5bn, and at a time when new social restrictions will likely depress the economy and with it government receipts. The continuing lack of any official plan to reduce the debt, or even official costings for the…