What might the economic challenge look like and are we entering a wartime economy?by Robert Skidelsky / March 19, 2020 / Leave a comment
There was general praise for Chancellor Rishi Sunak’s 11th March budget statement, which unveiled a stimulus package, worth £175bn over five years. Observer columnist Will Hutton summed up the mood: “Yet a Rubicon has been crossed. Keynesianism has been restored to its proper place in British public life.” Even the erstwhile austerians joined the chorus of praise, including George Osborne.
These budget calculations have now been overtaken by the coronavirus pandemic. It is already clear that “paying for the virus” will dwarf the promised spending on infrastructure. Sunak has already earmarked an extra £350bn, or 15 per cent of GDP, emergency package, an unprecedented jump outside wartime. And this is just the start. Boris Johnson and Donald Trump have donned the mantle of war leaders, the latter calling for “sacrifice” to ensure “complete victory.” Yet few have paused to consider what a war economy is like.
It is above all a shortage economy. All essential supplies are rationed. This is because, during a war, supply falls relative to civilian demand, partly because imports are interrupted, partly because the government’s demand for war materials goes up. The war economy is an excess demand economy. You can’t have both guns and butter.
Excess demand is the opposite of the typical Keynesian problem of deficient demand. But Keynes tackled it in his pamphlet How to Pay for the War (1940). Civilian consumption, he said, had to be reduced to release resources for military consumption. Without an increase in voluntary saving, there were only two ways to reduce civilian consumption: inflation or higher taxes.
Inflation would do the trick by making food and other civilian necessities more expensive, but this would hit the low-paid particularly hard. Keynes rejected this as socially unjust.
The solution he and the Treasury jointly hit on was to raise the standard rate of income tax to 50 per cent, with a top marginal rate of 97.5 per cent, and lower the threshold for paying taxes. The latter would bring 3.25m extra taxpayers into the income tax net. Everyone would pay the increased taxes which the war effort demanded, but the tax payments of the three million would be repayable after the war in the form of tax credits. There would also be rationing…