Rishi Sunak avoided calling the Bank of England last week to beg for an extension of the Treasury’s overdraft facility to meet his Covid-19 spending commitments.
The chancellor was saved that job by Andrew Bailey, the central bank’s governor, who saw the red flashing signs on the side of the Treasury’s headquarters from his Threadneedle Street offices almost three miles away. In a joint statement, the Treasury and the Bank said they had agreed to extend the use of the “ways and means” facility as a temporary measure during the disruption caused by Covid-19.
At the moment the Treasury has a standing facility of £400m that can be drawn on instantly and without discussion. What the total will be in a year’s time is not known, but analysts who have attempted to estimate the UK’s likely spending shortfall have settled on £200bn, give or take £50bn.
Bailey has strenuously denied that the central bank is now the Treasury’s slave after adding the overdraft facility to a £200bn quantitative easing boost announced last month, insisting that temporary means temporary. He is certainly right to say that there is a precedent for the Bank providing instant cash. Back in 2008 it extended almost £20bn to the then Labour chancellor, Alistair Darling, via the ways and means facility as he battled to save the financial services industry from going bust.
An extra £200bn of debts – no matter how they are apportioned by the Bank – would frighten most people, and there are some officials in the Treasury who are struggling to come to terms with the scale of the UK’s expected 2020 borrowing. Sunak, though, is understood to be reconciled to running up the largest debt mountain in peacetime.
Yet Bailey and Sunak cannot argue that such a large debt can in any way be considered temporary. Whether the loan sits inside the ways and means facility or is more obviously added to the Bank’s quantitative-easing lending scheme, which has accumulated £435bn of government debt, it will be too large to pay down in a matter of months, years, or even decades.
In 2005 the national debt stood at £500bn. By 2010 it was £1 trillion and it now stands at just over £1.8tn. The economy has grown in that time, but not by much. From a debt-to-GDP ratio in 2005 below 40%, the ratio is now around 86%.
So the question must then be: does the UK face another long period of austerity, as it did after the first and second world wars and following the 2008 financial crisis, or does something else happen to the loans made by the Bank of England, and government debt more generally?
Sunak was keen to point out in his March budget that the ups and downs of Britain’s debts have made little difference to the tumbling cost of financing them. In the year after the second world war finished, debt payments accounted for more than 14% of government spending. Last year that figure was below 4%.
Everyone with money, it seems, wants to play safe by lending their savings to governments with a strong record of paying the interest on their debts.
In this environment, when large numbers of investors are content with receiving interest of less than 1%, the Bank and the government can work together to finance huge debts without diverting funds from the public purse.
Temporary debts can become permanent, and a new era of monetary financing – where the Bank prints new money for the government to spend – dawns. The sooner we admit this and plot a course of action, the better.
Austerity is out of the question: the wealthiest must help to pay
The coronavirus pandemic is a humbling, once-in-a-century phenomenon that has drawn historical comparisons with societies under the siege of war. It could also be an event that triggers an economic levelling on a global scale too, just as developed nations experienced a radical reduction in inequality after the second world war.
For now, it is a case of watching the damage being wrought. The long-term scarring to national economies is already in evidence, with more than 16 million unemployed in the US, 1.2 million applications for universal credit in the UK and Germany widely forecast to be entering a deep recession.
But then will come the healing. The repairs to developed economies, which are already building up ballooning deficits, will be costly. Trillions of dollars will have been spent by governments on furlough schemes, emergency lending programmes and extra health funding. The bill will have to be met.
The options to pay for this will fall between well-drawn policy lines: austerity, or higher taxes. The political calculus in many countries – the UK included – will probably be that more austerity is unsustainable because no electorate will tolerate it. Which leaves the spotlight on taxes – and the rich.
The reaction of the world’s most notable billionaires has so far been commendable: $100m from the world’s richest man, Amazon tycoon Jeff Bezos, to American food banks; $1bn from Twitter founder Jack Dorsey towards battling the pandemic; and $100m from Bill and Melinda Gates towards vaccines.
The world’s 2,153 billionaires hold more wealth than 4.6 billion of their fellows on Earth, according to Oxfam. If that imbalance seemed intolerable before, it cannot be borne now. With a global economy on its knees, meaningful redistribution is going to be on the agenda.
Corporate Britain now showing No 10 why businesses matter
When the coronavirus crisis finally abates, will any prime-ministerial hopeful ever again utter the phrase “Fuck business”?
Those were the words that Boris Johnson allegedly used in 2018 as a retort to the alarm among business leaders about how the Brexit process was unfolding. Johnson’s government subsequently showed that it would not rush to the aid of companies in distress, letting the likes of Thomas Cook and Flybe go to the wall.
Now, though, the business community is helping to keep the country on its feet through unprecedented turmoil. Of course there are exceptions – firms that have dragged their feet protecting staff, or banks proving slow to lend to those in need. But for the most part, UK plc has shown its best side.
Manufacturers such as Airbus and Rolls-Royce are deploying their collective power to churn out medical ventilators; they would have made greater progress by now if the government had not been slow to give the order. Fashion firms including Burberry are making protective gear for the NHS amid severe shortages. Restaurants such as Leon and Honest Burger are dishing out free meals to NHS staff. Chemicals firm Ineos may not be everyone’s idea of a cuddly corporate, but it has built factories to manufacture hand sanitiser. The supermarkets are keeping the nation fed.
Of course, business is simultaneously being helped by the government in ways always previously thought impossible – with tax holidays, grants, the picking-up of staff wages and myriad other offers. The fact that some initiatives are working too slowly is largely down to the speed with which they were developed.
Politicians, of course, must never shy away from taking on corporate interests. But when all of this is over, the government may want to reassess its side of the social contract with business.
