Governments around the world spent an awful lot of money during the pandemic. Whether through furlough schemes or cheques in the post, the taps were opened on a grand scale to help protect our economies from collapsing.
Given the willingness of politicians to spend such huge sums of money, and the lack of any apparent pushback from economists or markets, you’d be forgiven for thinking that we’ve entered a new era where there are no limits to the money governments can spend. After all, if such huge sums can be apparently summoned out of nowhere to deal with a pandemic, why not do the same to pay for the net zero carbon transition, or to eliminate global poverty?
Sadly, the reality isn’t so simple. . It’s true that in a world of low interest rates the limits to what governments can safely spend and borrow are higher than before, but they are very uncertain and far from infinite. And if you look closely at how governments around the world are behaving it’s pretty clear that they know this too. In fact, just as our economies surge back to growth and the constraints on our lives are lifted, the normal affordability constraints on political decisions, and the difficult trade-offs they embody, are starting to bite again. We are living through a return to normal in more ways than one.
Consider the United States, where the scale of the pandemic spending was largest. At its peak this year the size of the economic rescue package was indeed quite extraordinary — almost 10 per cent of GDP. But the reality is that that huge spending boost is already fading fast, and the long-term package that is now being debated is much smaller than it appears — spread out over a decade it amounts to not much more than one per cent of national income per year. What’s more, the administration and many in Congress want to make sure that a lot of it is paid for by tax rises to ensure the impact on public debt is limited. Not so revolutionary after all.
The immediate fiscal response to the pandemic in the UK — most notably the furlough scheme — was large but not nearly as large as in the US.
In fact in many ways, the profile of UK spending and investment looks more balanced, with a less extreme short-term peak and a bigger ongoing ramp-up in infrastructure investment to the highest levels the UK has seen in 50 years or more. Many high-profile US economists who have long championed more spending have said they would have preferred a US profile much more like this, with more money spent on long term priorities and less on supporting consumption in the short term.
The UK is also ahead of the pack in having already announced future tax rises on company profits and incomes to help stabilise the ratio of national debt to income at its new higher level, a fiscal goal that almost all other advanced economies are coalescing around.
This then is the context for the difficult spending review facing our government this autumn and the usual political noise about friction between No 10 and 11 Downing Street that traditionally accompanies such events.
In London this is the context for difficult decisions about Tube fares, the future of TfL and council tax. And the fact that we have not, after all, entered a new world of unlimited resources is the reason why new entitlements to social care and the build-up of pressures on the NHS will likely have to be paid for with higher taxes.
A final word on financing the net zero transition, a challenge at least as serious as the pandemic. This too will have to make its case alongside other political priorities for scarce resources. But crucially, public spending isn’t the only tool available.
For example, the UK has done more than almost all other advanced countries to decarbonise its electricity sector over the last decade, with hardly any direct government spending. Instead the regulatory framework set up a decade ago created incentives for private sector investment in new renewable energy sources, funded ultimately through all of our energy bills. Now pension funds and other investors are looking for opportunities to do the same with other parts of the net zero transition; it just needs the right regulatory framework. Sometimes lean times call for innovative solutions – after all, necessity is the mother of invention.
Rupert Harrison is a multi-asset portfolio manager at BlackRock