Dr Eamonn Butler is Director of the Adam Smith Institute.
William Atkinson has built a fair case for parking the Covid debt away from the everyday public finances — an idea endorsed by Liz Truss recently — before knocking it down. Yes, the best time to have done this was last year, when Adam Smith Institute argued the case; then, interest rates were low and rate hikes seemed a distant fear. But it is still a good idea. Let me explain why.
What makes the idea necessary is that the Government borrowed hundreds of billions to get us over the Covid pandemic, producing record peacetime public debt of over £2 trillion, or around 100% of GDP. But the Covid borrowing is exceptional borrowing and should be treated as such. It’s the sort of borrowing that comes up only once or twice in a century — think the Napoleonic Wars, or the two World Wars. And let’s hope we won’t be facing wars, or pandemics, on that scale for another long while.
When governments want to borrow, they issue bonds — typically 10- or 20- or 30-year bonds that pay the holder annual interest and then are repaid, at face value, at the end of that period. If the government still wants to borrow, it issues new bonds when the old ones are retired. But if interest rates are on the way up, it obviously has to pay that higher interest on every new bond it issues.
We suggested that low interest rates could be locked in — and the exceptional Covid debt kept apart from the regular business of spending and borrowing — by instead issuing special ‘Covid Bonds’ with no fixed term. These consols (‘consolidated annuities’ in the jargon) would simply continue to pay interest until the government felt able to repay them. Which could be quite a while: famously the Napoleonic War consols, and those that Churchill issued to park the First World War debt, were only fully repaid in 2015.
Sure, with interest rates rising as they now are, the Government has left it too late to capture the full benefits of very long term, low interest funding. But there are still benefits to be had through this approach.
And sure, economic growth expectations have taken a nosedive too. But that is no reason why we cannot fund the Covid debt by this method. Quite the contrary. Low growth makes it hard for the government to keep on rolling over its 10-year debts, and if things stay bad, maybe its 20- and 30-year debts too. But the point is that, as long as growth is at least positive, our wealth, and our ability to repay our debts, continues to rise. As long as the public finances can still afford the interest payments, that means we can wait until we are much better off and repay this exceptional Covid debt. It might be any time this century, or even longer! But we are not being pushed into paying off an exceptional and very large debt before we have grown enough to afford it.
Now, William Atkinson is right that we need a growth agenda. To my mind, that means we need to cut taxes, especially taxes on business. We have a lot of holes to fill in our Covid-scarred economy, and business economists confirm that the thing that most deters people from starting new businesses, or from expanding existing ones, is high tax. It just adds to the risk of an already risky proposition. The recent NIC rise is one of the most economically inept policies I can remember, and that’s saying something.
Atkinson is also right that there must be spending cuts to facilitate tax reductions. That means two things. Firstly, as my colleague Dr Madsen Pirie has proposed, we need a systematic programme of prioritisation. What does government really need to do? What does the public really want from it? And what is it wasting time and money on doing that has little or even sometimes negative effect? Secondly, we need to look again at the Byzantine structure of Whitehall and see how things can be reconfigured to consolidate functions, reduce bureaucracy and save money. The ASI’s series of reports on this are out soon.
We learnt the hard way, prior to 1979, that you can’t spend your way out of debt. The only way is growth, and that is why we need a tax- and spending-reduction agenda, and a government that does less rather than imagining it has to stick its fingers into everything. But that agenda has little to do with how we fund government debt.
The key thing about using consols for the exceptional Covid expenditures (a cool £550 billion by my reckoning) is that it gets that exceptional debt out of the everyday discussion. Yes, I know that some will think it’s good to keep things as they are, in the hope that eye-watering debt levels will pressure the government to trim its spending sails. But not treating Covid debt separately will make it harder to pay off and will prompt governments to do exactly what they are doing now — to raise taxes in ways and to a level that actually chokes off growth and our ability to get ourselves out of hock and avoid the same stagflationary decline we saw in the 1960s and 1970s.