Wartime rhetoric has frequently been deployed during the coronavirus pandemic. In the all-too-familiar Downing Street press briefings, we hear Boris Johnson and ministers refer to COVID-19 as ‘the enemy’ and nurses and doctors working in the NHS as being on ‘the frontline’.
It’s certainly starting to look like a war where the public finances are concerned.
Figures released by the Office for National Statistics (ONS) last week (June 19) show that the UK national debt has exceeded 100 per cent of GDP for the first time since 1963.
After borrowing a record £55.2 billion in May, the UK’s debt is now officially bigger than its economy – 100.9 per cent of GDP.
Those concerned about this should remember we have been in worse situations before – the most striking example coming from wartime.
At the end of the Second World War in 1945, the UK national debt reached 250 per cent of GDP.
A large proportion of this was owed to the US, who financed the British war effort through the 1941 Lend Lease agreement, without which we probably couldn’t have continued to fight on.
Lend Lease loans were so massive at the time that we actually only paid them off in 2006.
Today’s world is very different from the broken one that emerged from the rubble of the deadliest war in history, but there are parallels where the economy is concerned.
Just as massive borrowing was justified for armaments, food and other materials in WWII, now it is being justified for PPE, ventilators and job protection schemes in the coronavirus crisis.
It’s not surprising that the effect on the public finances has been so pronounced. At the same time Government is ramping up support for people, businesses and jobs, falling tax receipts and economic inactivity is creating something of a perfect storm.
Many will be wondering what the Chancellor is going to do about the ballooning national debt, but this is not the most pressing issue on his agenda right now for a number of reasons.
Firstly, the public finances were in a strong position going into this crisis. The last decade of austerity budgets managed to reduce the deficit to 1.2 per cent in 2019 from around 9 per cent of GDP in 2010.
This means the Treasury has significant fiscal headroom to expand its balance sheet in response to the pandemic.
We are also in the fortunate position of having our own sovereign currency, which means the Bank of England is in control of the money supply and can inject liquidity into the economy in a way that some countries cannot.
Where indebted countries in the Eurozone like Greece and Italy have to wait for decisions to be taken by the European Central Bank, the UK Government can rely on Threadneedle Street to do whatever it takes to support the financial system.
The Bank of England has certainly been supportive during this crisis, recently expanding it asset purchasing programme to £745 billion, a significant of proportion of which has been used to buy government bonds, otherwise known as quantitative easing (QE).
It is also worth remembering that many countries rack up national debts either close to or in excess of their respective GDPs, without it becoming too much of a burden on the steady running of domestic economies in the long run.
Japan’s national debt, for example, is in excess of 230 per cent of GDP – similar to the record high in Britain at the end of WWII.
Japan is the third richest country in the world and one of the most advanced economies, with world-class infrastructure and industries. It is also planning to borrow at least 20 per cent of its GDP this year to finance the response to the pandemic.
This shows that a high national debt does not necessarily obstruct a country’s ability to borrow in the future.
The key issue for the Chancellor is therefore not how to reduce the national debt but how to prevent the kind of mass unemployment and business failures, which would have already occurred were it not for things like the Coronavirus Job Retention Scheme (CJRS).
In fact, the two issues cannot be considered in isolation. The Government’s ability to pay off its debts in the future is dependent on preventing long-term economic scarring in the here and now.
Permanently higher unemployment, higher welfare payments and lower consumer spending and business investment would be a major drag on economic growth in the future. Lower growth means a smaller economy and a bigger national debt.
Paradoxically, the best way for the Government to reduce the national debt tomorrow is to increase it today.