12 May 2020

It’s achieving growth, not paying off the debt, that will be difficult after Covid-19

The economic shocks to supply and demand are a bigger problem than higher government borrowing.

Britain's Chancellor of the Exchequer Rishi Sunak (L) speaks beside Britain's Prime Minister Boris Johnson (R) at a news conference addressing the government's response to the novel coronavirus COVID-19 outbreak, inside 10 Downing Street in London on March 17, 2020 - Britain on Tuesday, March 17, ramped up its response to the escalating coronavirus outbreak after the government imposed unprecedented peacetime measures prompted by scientific advice that infections and deaths would spiral without drastic action. (Photo by Matt Dunham / POOL / AFP) (Photo by MATT DUNHAM/POOL/AFP via Getty Images)

How will Rishi Sunak’s schemes be paid for? The Chancellor has opted to extend the furlough scheme until October, but, in reality, the logic of extending the scheme now means that the state will be supporting incomes for the foreseeable future.

The reality is there are two ways out of the coronavirus downturn: either we invent a vaccine or palliative treatments that render it acute; or vastly reduce the demands it makes on the National Health Service. Sooner or later, one of those two things will happen, but we don’t know exactly when. Nor can we accurately measure the bill at the end, other than to say it will be large.

But Sunak doesn’t need to worry about the cost of his extraordinary measures very much, if at all. In 1835, the British government took out a loan of £20m to reimburse slaveowners when it abolished slavery, which was then a vast sum and far in excess of anything governments had ever borrowed for one-off expenditure before, equivalent to around £17bn in today’s money. The taxpayer finally finished paying off that loan in 2015.

It’s worth noting that during the lifetime of the loan, the United Kingdom fought two world wars, lost its imperial possessions, weathered nine recessions and two global depressions, and endured three major pandemics. But thanks to overall growth, the sum – a huge one during its era of global domination – is less than a quarter of what the NHS spends on paper and pens every year.

The United Kingdom will be vastly wealthier in the future than it is today, and if it isn’t, it will have far, far bigger problems than the debts accrued during the coronavirus crisis. There are reasons to worry about government debt: if they encourage businesses to behave irresponsibly; if they convince businesses and/or private individuals that the state is irresponsible and can’t be trusted; or if they cause inflation. None of these risks apply at this present point in time.

The difficult challenges for Sunak will not come during the crisis, but afterwards. The economic problems caused by the lockdown are fairly simple ones – there has been a general demand shock thanks to the lockdown. But as we come out of lockdown, whenever that will be, the United Kingdom will be grappling with shocks both to supply and demand, and navigating those will be far more worrying. The government will find growth a much greater challenge than the debts it accrues during the pandemic.