Treasury officials have spent the last couple of weeks asking themselves how much the exchequer should spend fighting coronavirus. Curled up with laptops in the spare room or on the kitchen table, banished from their neoclassical headquarters, they have debated how many borrowed billions ought to be devoted to rescuing companies from bankruptcy and households from destitution.
Thinking about what a nation should spend when its income falls off a cliff, and how much it will owe as a consequence, is especially mind-boggling for conservative policymakers emerging from 10 years of austerity. Many have spent their entire careers telling voters that paying back what the country has borrowed is of paramount importance.
All money, in the age beyond gold coins, is real if the authorities say it is and the authorities are trusted. It could be printed on paper – or just sit in an accountant’s ledger – and still add up to money.
Until the financial crash, we relied on commercial banks to create most of our money, which they did by agreeing to provide loans. That all changed in 2008 when the Bank of England, like most other central banks, took on the job of creating money via quantitative easing. Now this practice is being used again, except this time using a calculator that appears never to run out of noughts.
Is this real money that will eventually need to be paid back? Or can it somehow be left behind by one generation to be written off by the next?
The Bank of England, which can already count £435bn of outstanding loans to the UK government under the QE programme, is preparing to expand that total by £200bn. This monetary stimulus is equal to just under 10% of the UK’s national income, or at least the income the UK registered in 2019.
Much of this money is going to be spent by Rishi Sunak on various rescue measures. At the moment he looks like spending 7.5% of GDP on coping mechanisms, but the severity of the downturn could quickly eat up all the Bank of England funds.
Such is the capacity of the central bank, and such is the reputation of sterling as a safe haven currency, however, that the government won’t need to go to the markets to borrow, even if the crisis worsens and the UK needs funds worth 20% of GDP. More QE will cover it.
The Federal Reserve’s lending to the US government has ballooned by a third in just one year to $5.2 trillion, or 23% of GDP, and the Fed chief, Jerome Powell, says the central bank can go further.
Is it real money that will eventually need to be paid back? Or can it somehow be left behind by one generation to be written off by the next?
The messages from British government are confusing. On one hand, ministers say taxes will need to rise once the crisis is over. Further, self-employed people, usually lauded as the lifeblood of an entrepreneurial economy, will need to pay the same as those on PAYE – almost as an extra punishment for needing the same coronavirus bailout as their employed cousins.
This suggests that austerity will be back with a vengeance, just in a different guise to 2008. There will be fewer cuts to public services and much more emphasis on households diverting a higher share of income to the state.
It’s not a very Tory answer to a debt crisis – but, more than that, if the extra taxes are applied to incomes, it will only rob households of their spending power and further dampen growth. Unless, that is, the taxes are applied to households that save more than they spend, or target wealth. This is desirable, though unlikely, even from a free-thinking chancellor. Sunak is still a Tory, after all, and unlikely to sanction any attacks on core constituencies such as wealthy and older voters.
An alternative to the gloom of neverending coronavirus repayments is modern monetary theory, resisted for years on both sides of the Atlantic, which has arrived like a Nightingale nurse armed with a bag of stimulants. The theory – and now practice – says that a central bank can print enough money to cover the interest on government debt for as long as it likes.
Willem Buiter, the Columbia University academic who was a founding member of the Bank of England’s monetary policy committee before becoming chief economist at Citigroup, says the US and UK now have money on tap in almost limitless amounts. The funds can sit on a central bank’s balance sheet for as long as it takes.
Critics of MMT argue it can prove to be too much and overheat an economy. At that point taxes would need to be increased – something that until now few believed western governments were capable of doing.
But in a post-pandemic world, inflation is unlikely to feature, and if it does, the central bank can just rein in its lending, as and when it deems necessary to keep inflation low.