HAMISH McRAE: Yes, Chancellor Rishi Sunak CAN afford all these bailout billions

For ten years, we were told there was no magic money tree. But austerity is over. 

In war, everything is different – and what we are witnessing is a classic case of war financing by the Government. 

The Chancellor Rishi Sunak is putting no limit on what he spends both to combat the coronavirus pandemic and to keep the economy pumped up until it can recover.

Eventually we will all have to pay for this tidal wave of public spending – just as taxpayers and savers had to pay for the two world wars. 

This time, instead of struggling to build enough Spitfires and getting food supplies past U-boats, we are grappling with how to get hold of enough ventilators and how to persuade people not to hoard loo rolls. 

We must find a fair way of helping restaurants and pubs that have had to close. And, in a much broader sense, enough money must be pumped into the country so that the economy does not collapse through the summer and can recover – we should all hope – come the autumn. 

The latest bout of extreme measures we saw from Rishi Sunak on Friday – shutting pubs and restaurants and funding people’s wages – is essential to contain the virus. But they will, inevitably, increase pressure on public finances further. 

The Government is throwing money at the problem because it has to. The question being asked after a decade of belt-tightening is where does this mountain of cash come from?

The answer is simple: the Government is borrowing it. Interest rates are at historic lows and governments of large developed economies – including our own – have huge scope to load up on cheap debt. 

In a crisis, they can do things that would have been unthinkable in normal times. You can catch the astonishing change in mood from Robert Chote, chairman of the Office for Budget Responsibility, the official watchdog that oversees Government finances. 

Last Tuesday – just six days after the Chancellor had added another £32billion to public spending and as he prepared to guarantee £330billion of loans to business – Chote told MPs: ‘This is not a time to be squeamish about one-off additions to public sector debt. In some ways, it’s like a wartime situation. During the Second World War, we ran deficits in excess of 20 per cent of GDP five years on the trot, and that was the right thing to do.’ 

Since then, there has been another cut in interest rates, another wave of spending commitments – and there will be more to come. The costs of the Second World War impoverished the country for a generation. 

The lavish public spending of Gordon Brown, coupled with the financial crash of 2008, led to the decade of austerity. 

So how big are the coronavirus debts likely to be? And when and how will we pay them back? 

The size of our economy last year, in terms of gross domestic product, was just over £2.2trillion. 

The Govern­ment deficit – the difference between income, mostly from taxes, and spending – for this financial year ending April 5 will be upwards of £50billion. It was £44billion to the end of February – before the emergency kicked in. 

National debt was just under £1.8trillion, equivalent to 79 per cent of our GDP. Public finances will now be hit by a triple whammy.

First, there is the wave of extra spending. Second, tax revenue will be down because there will be less activity and tax holidays. And third, there will be the loans to business supported by the Government, some of which will not be repaid in full.

Putting numbers on these costs is guesswork. We don’t know how long the pandemic will last, nor the strength of the recovery.

But if the damage is similar to that of the financial crisis of 2008 and the recession of 2009, that would mean the Government’s deficit in this coming financial year rising to ten per cent of GDP, or £220billion.

That would push national debt towards 90 per cent of GDP. If, perish the thought, it is worse and the recovery next year is weak and chaotic, we could end up with a national debt of perhaps 100 per cent of GDP in a couple of years’ time. 

Excessive national debt in peacetime hobbles economies. Britain doesn’t want that. But while the Government may be adopting, rightly, a wartime attitude to spending, the outcome on its finances is going to be nothing like that of war. 

At the end of the Second World War, after six years of huge deficits and the shipping of our gold reserves to the US, our national debt reached 240 per cent of GDP.

Britain did not pay its final instalment on its debts to the US until 2006. The bulk of that debt was paid in two ways – through very high tax rates and by cheating savers. 

Interest rates – particularly on government borrowing – were held down so that savings grew slower than the cost of living for years. It also meant that the country’s debts looked less onerous over time.

Gradually, year by year through the 1950s, 1960s and 1970s, inflation crept upwards, whittling away the real value of our debt. Interest rates lagged behind. Thanks to inflation and reasonable economic growth, the country got debt down to below 100 per cent of GDP by 1962 and to 25 per cent of GDP in 1991 – the same level as in 1914. 

This time round, we are unlikely to raise taxes by any significant amount. There is no point in increasing top rates of income tax for the very practical reason that it will not bring in any more money and may bring in less.

Go above 40 or 50 per cent and rich people cut their income or move abroad. Today, that is a much greater risk as we are a more mobile society than we were in the past.

As for other taxes, Government revenue has been stuck at around 38 per cent of GDP since the early 1980s. So unless you believe people are prepared to pay more tax than at any stage for the past 40 years, the answer must lie elsewhere.

Which leads us to financial repression. Maybe there are some vanity projects that face the axe to help the Government save money – HS2 may, again, come under intense pressure – but the big story will be that interest rates will be held below inflation for years to come. They already are.

The yield on ten year Government bonds is 0.8 per cent. Inflation is 1.8 per cent. Keep this up and the real value of the debt is being whittled away by one per cent a year.

The target for inflation is two per cent, so if anything, the value of the debt will fall faster. Can the Government keep this up? Will we as a society put up with it? 

The honest answer is we don’t know. In the short term, Ministers can do more or less anything. If the financial markets do not want to buy Government debt, the Bank of England can print the money, with virtually no upper limit.

In the longer term, though, there are limits. This takes the form of our debt rating as a country – a symbol of whether we can be trusted to borrow. 

If the Government is borrowing money from the rest of the world, the financial markets need to believe we will pay it back. It was fears over that credibility that drove the Coalition Government in 2010 to bring in what turned out to be a ten-year slog to get borrowing under control.

Once the crisis has passed, the Government will have to pull back the deficit and start to chip away at the size of the national debt. The bad news is that we will all have to pay for this, either in slightly higher taxes or slightly lower returns on our savings.

The good news is the scale of the burden is nothing like that of the Second World War. We know that after sudden shocks economies can bounce back fast. 

The key is to stop real destruction taking place in our economy. That is why wartime finance, in peacetime, can make sense.