It was pretty clear, before this all started, that the Prime Minister was committed to ending austerity. Underfunded services up and down the country could rejoice – here was a manifesto that was promising to increase public spending, after a decade of concentration on deficit reduction. But during the few days where the Chancellor ripped up the rule book in order to respond to the crisis and with furlough pay extended until October, are we going to be faced with a hefty bill once this all is over? Recent changes to the furlough scheme suggest that the government shares this worry, with the Treasury planning to pass on some of the furlough wage costs back to employers from as early as August.
As we emerged from the global financial crisis, the UK rushed into austerity and some pundits have argued that this was a pretty catastrophic mistake – instead of worrying about an increased level of debt, the government should have focused on having as complete a recovery as possible – in for a penny, in for a pound. Some estimate that the recovery from the recession that ought to have happened by 2010 was delayed by austerity until 2013.
This seems unintuitive – how does holding onto debt make us better off? In the long term, historically low interest rates make it cheap to have debt at the moment – the government can borrow money for basically nothing. At the beginning of the crisis, the Bank of England lowered rates from 0.75% to 0.1% in an unprecedented move. The interest rate being so low also encourages consumption; people don’t want to save money when they won’t earn very much interest on it, and businesses will save less too. When we come out of lockdown, the increase in consumption should cause inflation – a rise in prices – because there will be more consumer demand. Inflation in this context is also a good thing, as it means that in real terms, government debt is smaller. There isn’t a huge deal of worry about an inflationary crisis either, as interest rates can be increased to lower consumption.
Government spending now can not only stimulate consumption later on, but also raise consumption itself. In fact, when the government spends money, it can actually get more bang for its buck than when an average consumer spends, through a fiscal multiplier effect [SM3] . Provided that a government spends wisely, its money can have more of an impact than ours will. However, consumer spending is what will ultimately save businesses – in order to kickstart the economy, we need to get money flowing around the system again. This won’t happen to the same extent or as quickly if the government implements a policy of austerity.
Leaked documents from the Treasury suggest that there will be no attempt to reduce the debt to GDP ratio until the end of the crisis. This is wonderful news, as it seems like a commitment to continuing to support businesses and families until the end of the crisis to the same extent that the government is now. But if the focus shifts away from recovery to panicking about high debt levels we will make recovery a lot harder. As with everything right now, we need to be as positive as possible; our rhetoric must change from one that promotes debt reduction and a fear of overspending, to one that encourages as full a recovery as possible. Growth and the public sector should be prioritised over balancing the books, if we really want our economy to be healthy in the long term.
There have been positive signs. Johnson appears to be learning from the mistakes of his fellow Bullingdon crony, George Osborne, and is said to still be committed to anti-austerity policies. There is little worry of a sovereign debt crisis, as the central bank will buy government debt to stop that happening. However, the same tired old lines being used by Treasury officials is a worrying indication that as soon as everything returns to a version of normal, austerity will be the headline act once more. This is not the time to be thinking of the deficit – we need to spend before we save. The recovery must come first: it would be downright stupid not to learn from the mistakes made only a decade ago.