Britain’s debt level has exceeded 100 percent of GDP for the first time since 1961, and Rishi Sunak’s planned cuts and tax increases will hardly take effect – even if he isn’t forced to repeal them, which in itself is a big deal. presumption.
Nothing is Sunak announced today which would have seen Britain almost reduce its debt, and indeed in the short term many of its actions would add to it.
Should we be worried? Is this country close to “maximizing its credit cards”? The short answer is no. Britain has two ways to spend more than it collects in tax revenue. The first is being able to borrow money on the international money market. At present, governments, especially in developed countries, find this very easy, because private sector consumption is weak, private investment is still weaker, and interest among savers for risk is very low: as far as they are concerned, low-risk government debt is one- the only game in town. Because interest rates are very low worldwide, the costs of paying these debts are also very low, and because the UK has debts that are due, they are very much protected from changes in interest rates. However, it is unlikely that interest rates will rise much in the short term.
Of course, if private sector spending and investment increases, and if growth and inflation increase, then all governments will face constraints on their ability to raise money in this way. However, this will be good it will increase the government’s financial flexibility in a number of ways. Growth and income will rise, which will increase tax revenue and make it easier politically to raise taxes. The enormous degree of freedom that governments have to borrow is a product of economic conditions that have many negative consequences, including on the ability of governments to finance their activities without borrowing.
Basically, everyone – the International Monetary Fund, the Institute of Fiscal Studies, almost any economist – agrees that today we don’t have to worry about government deficits or debt, and that governments should borrow more, not just because of current market conditions. make it easy, but because they need actively someone who acts as a haven for savers. Now is the time for the government to spend time: and the dual task of defusing the Coronavirus recession and facilitating the transition to a greener economy is an ideal policy priority.
Then there is another way the British government can fund its activities, namely by using the lending capacity of our independent central bank to borrow money directly. The exact limitations and drawbacks of this facility are debatable – but it doesn’t matter, as we are so far from having to rely on them. Talk of the government having “maxed out the national credit card” is economically illiterate and should be avoided.