13 May 2020

Why Rishi Sunak is right to prioritise growth over paying down debt

There is no need for the UK government to rush to reduce higher borrowing caused by the Covid-19 crisis.

LONDON, ENGLAND - 13 MAY: Chancellor of the Exchequer, Rishi Sunak, arrives at 10 Downing Street on May 13, 2020 in London, United Kingdom . The prime minister announced the general contours of a phased exit from the current lockdown, adopted nearly two months ago in an effort curb the spread of Covid-19. (Photo by Chris J Ratcliffe/Getty Images)

The Office of National Statistics has confirmed what we all knew: the United Kingdom is on course for the deepest recession in modern times thanks to the novel coronavirus.

Rishi Sunak has sensibly opted to extend the furlough scheme until October, and has tweaked it to make it easier for businesses which can’t afford to pay people full-time to part-furlough staff. And the reality is that it may have to be extended again – until either a vaccine or palliative treatments advance our ability to fight the disease, we will be living with anti-viral measures that will limit growth and employment for some time.

That, coupled with the extraordinary financial measures that are going to be required for the duration of the crisis, is why some people are already fretting about how “the bill” will be paid for. The Telegraph has got hold of a leaked Treasury proposal that the government freeze public sector pay and hike taxes to tackle the debt.

I explain in more detail here why I don’t think the government particularly needs to worry about its coronavirus debts, but the the short version is this: the United Kingdom took on extraordinary debt burdens to reimburse slave owners in 1835, to pay off its war debts in 1919 and 1945, and didn’t pay those loans off until 2015, 2014 and 2005 respectively. Long-term economic growth will take care of our coronavirus debts. Bluntly, the pre-coronavirus 2019 and 2020 spending plans, in which the government planned to spend more on the NHS and education without raising significant revenue, were far more problematic, fiscally speaking, than the large amounts being borrowed to weather the coronavirus crisis and its economic aftermath.

The most important part of today’s Telegraph story is the suggestion that Rishi Sunak agrees: his fiscal priority will not be to pay down the debt but merely to meet the cost of additional day-to-day spending, a far more sensible approach.

But just because it’s more sensible to target growth as we try to combat the coronavirus recession that doesn’t make it simpler. At the moment, our economic problem is a simple demand shock. But when the lockdown ends, the return to growth will involve navigating both demand and supply shocks and will be a task far trickier than anything Sunak has faced thus far.