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Stop nonsense talk of a magic money tree

If money-printing was sustainable, and governments could borrow with abandon, the Roman Empire would still exist

Money tree

State borrowing rose to the highest level on record in the first half of the fiscal year, as anti-Covid measures weighed heavily on the UK’s public finances. Between April and September, the Government spent £246bn more than it raised in taxes, nearly three times the previous first-half record.

With new three-tier regional restrictions stoking division, it can’t be long before we return to a de facto national lockdown. That will crush what recovery we’ve seen, putting our public finances under even more pressure.

Central government receipts amounted to £247bn since April, some 21pc down on the same period last year. Spending spiralled to £493bn, meanwhile, 45pc up. The economy will at best flatline on a year-on-year basis over the next six months – and, unless lockdown measures are eased, could easily go back into nosedive.

So the deepest economic decline in three centuries could yet get deeper still. That will mean even more spending on business support measures, as our tax base is further depleted. And as unemployment rises, benefit spending will spiral with tax revenues falling even more.

The UK’s national debt is now 103.5pc of GDP – up from 80pc this time last year and just 35pc before the 2008 global financial crisis – and with the best will in the world, the fiscal outlook will surely worsen before it improves.

Many say we shouldn’t worry about our public finances. Economists are lining up to argue that borrowing costs are historically low, urging ministers to forget about fiscal prudence.

While understandable, this amounts to very bad advice. It makes no sense to raise taxes now, and support spending matters. But we must always be mindful of what we’re spending and how such spending will be financed.

In this world of quantitative easing and ultra-low interest rates, though, mainstream politicians are gradually convincing themselves we can spend without limit. “It’s different this time,” I keep hearing from otherwise sensible people.

Alas, these are some of the most dangerous words in the English language. For if money-printing was sustainable, and governments could borrow with abandon, the Roman Empire would still exist. If this kind of policymaking worked in the long-term, Zimbabwe and Argentina would be economic superpowers.

Rishi Sunak had little choice last week but to expand his Covid-related business support package. The initial furlough scheme – with government paying a big slice of the wages of those temporarily laid off – ends this week. The new scheme was always designed to be less generous, given the strain on the public finances.

But what the Chancellor announced in last month’s Winter Economy Plan was tailored for an economy genuinely recovering. New multi-tier lockdowns meant he needed to give ground – extending employers more support to avoid a huge redundancy spike

The headline 4.1pc unemployment rate is a huge underestimate. This official definition requires the jobless to be looking for work – which many haven’t been due to Covid and with countless job centres closed. Claimant count figures, along with PAYE data, point to unemployment already approaching 9-10pc.

Renewed lockdown meant Sunak had to act, returning to something closer to the original furlough scheme, with the state providing even more support.

But it’s not right to argue the Government can keep borrowing because, as so many economists put it hoping to end any discussion, “private investors are lending to the Government at ultra-low interest rates, so what is the problem?”

The problem is that gilt issuance on today’s massive scale is only possible because investors are only buying government bonds knowing the vast majority will then by bought by the Bank of England, using newly created money, on the secondary market.

This is almost the same as the central bank printing money to buy government debt directly – except, for now, we’re trying to make such a discredited practice look a bit less insane using a dash of financial engineering.

I had no problem with the Bank of England launching its QE programme in the aftermath of the global financial crisis – because it was announced as a £50bn programme to prevent a deeply damaging banking collapse and, contingent on that, would allow root-and-branch reforms to make our banking system less concentrated.

Ten years on, even before Covid, the UK’s QE programme had ballooned to £425bn – over eight times more than originally announced. Bloated stock and bonds markets became addicted to the QE drip-feed and still are.

Now, as government spending keeps rising, and the Bank buys ever more gilts, QE has spiked to £745bn. And “too-big-to-fail” remains a major problem.

So the Government isn’t selling debt on the open market, as I keep hearing from fellow economists, because the gilt market is rigged, the result of a monetary experiment without precedent.

Yes, at a base rate of 0.1pc, gilts are also being “sold” – often to be bought back again – at ultra-low rates. Even now, though, the Government is spending about £40bn a year on debt service payments, more than we spend on defence. What if bond markets take umbrage and borrowing costs double, while remaining low by historic standards. Debt service costs would balloon.

How about if there is a marked change of mood – even short of a proper panic – with investors worried the house of cards looks unstable?

How about if implicit government plans to generate just a bit more inflation and related currency debasement to help erode the huge debt stock seem a bit risky, with Seventies-style stagflation in the offing, given sluggish growth, low investment across a Covid-ravaged economy? What happens then?

The problem is our decision-makers are acting as if spending can be endless, as if the magic money tree really exists. “If we can do QE for the bankers, let’s do it for the whole economy, forever.” That’s the logic of where we are going – some senior politicians are already there. Such nonsense talk needs to stop.

Britain is inherently a strong economy. We will recover from this impasse and prosperity will return. But fiscal responsibility must always frame our politics. And economic reality must now play a vital role in the fast-emerging debate over the case for lockdown itself.

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