Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?by Jonathan Portes vs Bill Mitchell / August 29, 2020 / Leave a comment
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…