Just think. Barely a month ago government was still sticking to its ‘fiscal rules’ about how much it could borrow and for what. Loosening the ‘austerity’ straitjacket slightly but still reminding us that there was no ‘magic money tree’, everything needed to be costed and paid for. On the eve of Chancellor’s ‘coronavirus’ budget, announcing large spending increases but representing a fraction of what might be coming now, Theresa May cut a forlorn figure, preaching the importance of financial prudence from the back benches. We don’t quite know how much borrowing the government will need to undertake to survive the corona virus – what is clear is that there’ll be billions of pounds of ‘new’ money – more like a magic money forest!
In the ‘quantitative easing’ introduced after the financial crash, approaching £400 billion of new money was created to increase liquidity in the banking sector (the Bank of England bought up bonds held by banks in exchange for ‘cash’) – but most of this didn’t get into the real economy, instead inflating asset prices and the value of commercial property.
This time around, rather than buying back ‘second hand’ debt in the market and facing economic catastrophe, the Bank of England is lending to the Treasury directly – In the US, the Fed will be doing the same. Just like the years of the two world wars, particularly the first, the proportion of public debt to income national debt will rocket.
Unlike the post-war years though, when a long period of prosperity, rising incomes and falling inequality meant the proportion of national debt fell, coronavirus, despite the massive government intervention, will almost certainly push economies into recession (maybe even depression) – with some City forecasts suggesting as much as an 8% fall in this year’s GDP, if the crisis continues into the summer.
Of key importance is who the debt is owed to. The Bank of England and the Treasury are both part of the same state structure – so the Treasury liabilities to the Bank are largely illusionary and if necessary, able to be ‘written off’ without further ado. It therefore need not put a break on any recovery plan.
But will the biggest state intervention since the second world war destroy the validity of neo-liberal ideas about budgets, borrowing and spending? Up until the last election, Labour despite its spending promises, but fearing a stock market crash or a run on the pound, was reluctant to stray too much from economic orthodoxy. The left now has everything to play for.