‘Quick’ stats update…Funding the Pandemic: The so-called Quantitative Easing part is strange and interesting, and will follow on as a Part 2…
Our UK Government just borrowed another £22.3Bn in October alone. It was double this in April and May, so be grateful for small mercies! This is a long trend now with furlough etc through to March. These sums also cover a massive hole in tax revenues which is being borrowed against. Plus the Gov’t did further ‘borrowing’ of £300Bn of Quantitative Easing (QE) this year. More of this method in Part 2. Assuming this QE is paid back, overall borrowing to fund the pandemic (started March 2020) will be miles over half a trillion within a year, or around 30% of everything that everybody in our economy made and spent in 2019. Wow. So the pandemic is costing us in effect over a quarter of all we earn – most just haven’t felt all this…yet.
Of course the Gov’t would face massive opposition if the economy collapsed to this extent, hence the borrowing. Borrowing simply spreads the payments, like buying a sofa on credit. But of course you pay a lot more this way – mostly much later. Worse, the sofa may look good and provide comfort, but it won’t last long and will be long gone, many years before the payments run out. Have you ever had a long-term loan on a short-term product? I’ve messed up before here and it’s just chronic financial pain! So watch the recession to come later. Our prediction of 100,000 jobs lost every month has been happening the last three months fairly closely. New furlough may slow this, but won’t solve this rising unemployment.
So our other earlier prediction that the pandemic will cost every working person about an additional £1,000 per year every year in tax for the rest of their working lives to pay the debt down, looks still to be about right.
This is made even worse because, since we never recovered public finances fully after the Financial Crash of 2008, the Gov’t was already in hock to the tune of £1.8 trillion – or 85% of everything we earn each year. That means each working person in the country will have to pay around £50,000 in future taxes just to pay for PAST spending and get debt very low. And the pandemic borrowing now adds another £10,000+ per taxpayer to that. Of course, no-one in politics plans to pay it back – just pay the interest at 2% and throw the capital debt at the next generation. Hmm…that’s not a solution if you keep doing it.
To put the numbers into context, the interest and a reasonable bit of long-term capital repayment on the pandemic borrowing applied to the Education budget only, will reduce the amount we can spend on Education by a third over the next 20 years compared to not doing this borrowing. Or the NHS by a fifth (not both though, but it’s a lot of future lives affected either way). It’s massive.
This month is the first time since 1961, when Gov’t debt was coming down rapidly as we paid off WWII, that this debt is more than a year’s salary per taxpayer – over 100% of GDP. Of course the political plan is never to pay it off, but to get the nation’s rapidly rising overdraft stable in 2022 and after. But with business stricken, tax revenues will stay low, and this won’t happen.
The next problem will be whether ‘people’ (savers, banks, pension funds, other financial institutions, more wealthy foreign governments) will even want to lend to us – either at all or at the required low rates of interest. They may start to think we won’t be able to pay it back without ‘printing’ it and causing problems that way (done by QE). Boris and Rishi have to make sure we don’t lose our AAA/AA-ish credit rating as a nation any further.
But does Quantitative Easing help or hinder the debt problem?
An exponential pandemic with infectious asymptomatic time-lags is a nasty threat, threatening the older and vulnerable (up to 15m people in UK are in this category of risk) and long covid issues for some younger ones has led us to this point. We are balancing fatalities, NHS overload threat, and unknown long-term virus harm, with opening the economy. It’s tough, but hopefully some light from April. The sooner things get sorted, the more the Government are justified in their debt actions. But if it takes longer, the debt spiral may start to get out of control and any health/economy balance will have to swing back to opening the economy at the cost of exponential rises in fatalities. Hence the Gov’t’s relief at the vaccines on the horizon, rightly or wrongly. Hobson’s choice otherwise.
And no wonder the libertarians are mad. From their perspective we’re descending into a permanently more controlled ££-tech/bio-tech, socialist (Gov’t was already spending 45% of GDP itself and currently it’s massively more), fake money, crippling public debt society with some global giant companies doing well (tech, deliveries, megastores), while small indigenous free market creative entrepreneurs get banned from operating by ‘big brother’. I don’t buy all that, but it’s partly the case, and not a good look. Fortunately I have great faith in British creativity and entrepreneurism at all socio-economic levels and people will bounce back despite everything.
What’s for sure either way is that our future younger workers will long feel resentful of our 2020/21 borrowing when the reality of the ‘exponentials with time lags’ threats fade in the social memory. Post-pandemic, those who are benefitting from the current ££ support need to realise it, and will need to keep explaining why we did what we did for a long time!
I hope you’re doing well both economically and health-wise. 2020 has been hard on us all but all good wishes for Diwali, Thanksgiving, Christmas, Hanukkah etc, and for 2021.
#givethanks