{"id":7709,"date":"2020-04-22T15:48:34","date_gmt":"2020-04-22T14:48:34","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=7709"},"modified":"2020-04-23T15:55:11","modified_gmt":"2020-04-23T14:55:11","slug":"coronavirus-will-drive-public-debt-far-higher-than-expected-but-that-doesnt-mean-a-return-to-austerity","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/coronavirus-will-drive-public-debt-far-higher-than-expected-but-that-doesnt-mean-a-return-to-austerity\/","title":{"rendered":"Coronavirus will drive public debt far higher than expected \u2013 but that doesn\u2019t mean a return to austerity"},"content":{"rendered":"\n

In the months before the\ncoronavirus pandemic, the devotion of many mainstream politicians to balanced\nbudgets and austerity was waning. The likes of Germany and the US were looking at<\/a> improving economic growth\nthrough greater government spending, reasoning that central banks were running\nout of ammunition.<\/p>\n\n\n\n

The coronavirus has accelerated\nthis rethink, as shown in a recent Financial Times editorial<\/a> calling for a new\n\u201csocial contract that benefits everyone\u201d. Such a contract would increase\nspending to address social inequalities, substantially expanding the public\nsector.<\/p>\n\n\n\n

This fundamental shift in the\nface of disaster should not surprise us. In 2008, there was much talk<\/a> of abandoning light-touch banking\nregulation, though it was later watered down. Will change endure this time?<\/p>\n\n\n\n

Wars and\nspending<\/h2>\n\n\n\n

It is worth looking at what\nhappened after the two world wars. In 1913, British government spending<\/a> was 18.5% of\nGDP. It rose to 59% in 1916. By 1922 it was back to 18.7%, and essentially\nremained so for the interwar period.<\/p>\n\n\n\n

Public spending as % of GDP<\/strong><\/p>\n\n\n\n

\"\"
Bank of England<\/a> <\/figcaption><\/figure>\n\n\n\n

<\/a>Wartime public expenditure\npeaked at 61% of GDP in 1945. During the Attlee years it settled into the 30%\nrange \u2013 over ten points higher than in 1938 \u2013 partly spent establishing the\nNHS. Even when the Conservatives took over in 1951, spending never again fell\nbelow 27% of GDP.<\/p>\n\n\n\n

Economic growth differed during\nthese two post-war periods. Between 1919 and 1938, it averaged less than 1% a\nyear. After the second world war, there was a decade of 2.5% annual expansion.\nContrasting public spending levels were a crucial difference.<\/p>\n\n\n\n

UK GDP growth 1899-2019<\/strong><\/p>\n\n\n\n

\"\"
Bank of England<\/a> <\/figcaption><\/figure>\n\n\n\n

<\/a><\/p>\n\n\n\n

The next chart looks at these\nperiods\u2019 fiscal deficits, meaning government income minus outgoings. Both\nwar-time deficits reached about 30% of GDP then quickly declined, hitting\nsurplus after eight and ten years respectively.<\/p>\n\n\n\n

This happened after the first\nworld war, despite the stagnant economy, thanks to a large reduction in\nmilitary expenditure. Compare the 2007-09 crisis, whose much smaller deficit\nhas endured longer than it took to return to surplus after either war.<\/p>\n\n\n\n

Deficits during crises<\/strong><\/p>\n\n\n\n

\"\"
Bank of England\/Office for National Statistics<\/a> <\/figcaption><\/figure>\n\n\n\n

<\/a><\/p>\n\n\n\n

There are two reasons. There\nhas been nothing to compare to the cuts in military spending. Yet just like\nafter 1918, there has been weaker growth because austerity has depressed demand\nand business activity.<\/p>\n\n\n\n

Where we\u2019re\nheading<\/h2>\n\n\n\n

By one recent forecast<\/a>, GDP for 2020 could fall\n15%. Even the government\u2019s Office for Budget Responsibility (OBR) predicts<\/a> 13%. If 15% is correct and the\n2007-09 collapse is anything to go by, tax revenues might fall 25%. Tax\nrevenues should fall more sharply than GDP because much of the tax system is\nprogressive \u2013 for example, no one pays tax on their first \u00a312,500 of annual\nincome, so a 15% drop in the average income will erase more than 15% of the\naverage person\u2019s income tax liability.<\/p>\n\n\n\n

By my calculations, a 15% GDP\ndrop plus government recovery spending that I suspect will reach \u00a3100 billion\nwill produce a fiscal deficit of 16% of GDP \u2013 over \u00a3300 billion (the OBR forecasts<\/a> 14%; several weeks ago, the\nInstitute for Fiscal Studies thought\n8%<\/a> was possible).<\/p>\n\n\n\n

Even if the economy quickly\nreturns to 2.5% annual growth, I calculate that public debt will rise to a peak\nof around 150% of GDP. This is around 50% more debt than the OBR expects, which\nseems to assume a return to near 2% growth in 2021 without any further recovery\nspending beyond the initial<\/a> \u00a370 billion \u2013 not\ntenable in my view.<\/p>\n\n\n\n

No doubt some will call for\nbalanced budgets aka more austerity, but I think those favouring increased\npublic spending will probably win out. The UK\u2019s experience after the second\nworld war suggests that such high public deficit and debt levels do not in\nthemselves prevent strong recovery or put an intolerable burden on the state.<\/p>\n\n\n\n

Admittedly recovery could be\nundermined by household and business debt vastly higher than after the second\nworld war. Both have eased since the 2007-09 crisis, per the chart below, but\nhousehold debt in particular is rising again<\/a> \u2013 driven this time by credit\ncard and student debt rather than mortgages.<\/p>\n\n\n\n

Private debt as % GDP<\/strong><\/p>\n\n\n\n

\"\"
Bank of International Settlements<\/a> <\/figcaption><\/figure>\n\n\n\n

<\/p>\n\n\n\n

To achieve sustained recovery,\nthe government might need to<\/a> have household debt partially\ncancelled. The chancellor\u2019s recovery programme<\/a> addresses corporate debt\nto some extent, by providing businesses with loans with generous payback\nconditions and other support.<\/p>\n\n\n\n

A Tory\nsocialism?<\/h2>\n\n\n\n

Assuming greater government\nspending leads to a steady recovery, the ideology of balanced budgets as a continuous\npolicy goal is unlikely to return. But this doesn\u2019t mean the global order will\nbe overhauled. Some commentators predict the end of neoliberalism<\/a> or a broader resurgence<\/a> of social-democrat\npolicies, but I think this premature. Both world wars exposed ills in the social\nsystem, but only after the second world war did a major shift take place.<\/p>\n\n\n\n

Britain will have a\nConservative government with a large majority for four more years. The Sun may\nfear a \u201cTory socialist state<\/a>\u201d, but I doubt we\u2019ll see any\nmajor expansion of public provision or regulation. Four decades of consumerism\nhave instilled an ideology in many people that taxes are a burden that prevent\n\u201cfreedom of choice\u201d through the market.<\/p>\n\n\n\n

For this faith in markets to be swept away, the health crisis might have to lead to shortages<\/a> of necessities, perhaps linked to disrupted international trade<\/a>. Perhaps even a Conservative government might then introduce<\/a> rationing and price controls. But this takes us deep into speculative territory, so we will see how things play out.<\/p>\n\n\n\n

This piece is cross-posted from The Conversation<\/a><\/em> <\/p>\n\n\n\n

Photo credit: Flickr\/Number Ten<\/a><\/em>. <\/p>\n","protected":false},"excerpt":{"rendered":"

To achieve sustained recovery, the government might need to have household debt partially cancelled. The chancellor\u2019s recovery programme addresses corporate debt to some extent, by providing businesses with loans with generous payback conditions and other support.<\/p>\n","protected":false},"author":11,"featured_media":7716,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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