As the Financial Times has noted this morning:
Ministers will have to raise taxes sharply in the coming months to deal with an estimated £337bn deficit in the current financial year in the wake of the coronavirus pandemic, according to a leaked Treasury document.
The paper sets out a proposed “policy package” of tax rises and spending cuts which could have to be announced soon in order to “enhance credibility and boost investor confidence”.
The document, revealed in the Daily Telegraph, warns that the country could face a “sovereign debt crisis” unless the economy recovers quickly.
The Telegraph provides more detail. As they note:
The document, dated May 5 and marked "Official — market sensitive", reveals that the "base case scenario" now forecasts that Britain will have a £337 billion budget deficit this year, compared to the forecast £55 billion in March's Budget.
It says tax rises and spending cuts which would raise between £25 billion and £30 billion — equivalent to a 5p increase in the basic rate of income tax — would be needed to fund the increased debt, and presents Mr Sunak with a menu of proposed measures to make up the shortfall.
They add:
In the worst case scenario — a so-called "L-shaped economic decline" — the figure would increase to a £516 billion deficit in the current financial year, rising to a cumulative £1.19 trillion over five years. This would require up to £90 billion in annual tax rises and/or spending cuts over the next few years.
Even the best-case V-shaped scenario, in which the economy falls sharply but recovers equally quickly — described as "optimistic" in the document — would lead to a £209 billion deficit this year.
It is hard to know where to start when commenting on these reports, so absurd do they seem. But comment, I think I must.
In that case, first note that the ‘Treasury view' that the primary object of government is to balance the books does still, very clearly, persist. Nearly a century of understanding on the utter destructiveness of this idea has appeared not to permeate the Treasury's walls.
Second, note that at least they are right in appreciating that we are to face record deficits.
And third, that they are also right in dismissing as very unlikely the V shaped recoveries fancifully forecast by the Office for Budget Responsibility and Bank of England.
Fourth, they are also, apparently, suggesting that only part of the costs of a deficit need be covered. It is not apparent from what I have read as to why they have determined why that proportion might be a bit less than 20% of the total sum. That, of course, is not the cost of funding, which is negligible. Note that in the worst case (as the Treasury sees it) the Telegraph notes that:
In the worst case scenario — a so-called "L-shaped economic decline" — the figure would increase to a £516 billion deficit in the current financial year, rising to a cumulative £1.19 trillion over five years. This would require up to £90 billion in annual tax rises and/or spending cuts over the next few years.
The relationship between borrowing and the supposed cost that must be covered with tax is not clear.
Sixth, the priority that the Treasury has is apparent from this comment:
The Treasury document warns ministers that, if Britain's economy does not recover soon, the country could be thrown into a 1976-style "sovereign debt crisis", a situation that led to an international bailout.
So, we are back to the mantra that the job is the government is to keep the bond markets happy.
And seventh, it is noted that this could be done by increasing income tax by up to 5p in the pound, by ending the triple lock for pensioners, and freezing public sector (including NHS) pay.
All of this is ridiculous. It is the economics of another era. It is as if we have learned nothing. So let's say what we have learned.
First, tax increases make economic downturns very much worse. We are facing the worst economic downturn since 1706, and the Treasury wants to make it worse. In itself that shows how absurd their thinking is. How can they think it their duty to send us further into recession, repeating the most basic error of the 1930s?
Second, we now have quantitative easing. £635 billion government bonds are now owned by the government. They will never be reissued to the market, as the Bank of England has now tacitly admitted. This is then new money, created without the involvement of the markets. We now know we can do that.
Third, we know inflation does not occur as a result if we are not at full employment. We currently have 10 million unemployed people.
Fourth, we know that this practice is commonplace: every government that can do it is doing it. And so too is the European Central Bank.
Fifth, we know as a result that the power of bond traders is broken, whether that be on rates, or deficits, or any other issue: since we now know that we are not in any way dependent upon them because if at any point they get uppity the government can simply begin another quantitative easing programme, the chance of a sovereign debt crisis is zero. And that is most especially true when every government is in the same situation.
Sixth, we know there is a massive demand for sovereign debt - including that of the UK. That is despite exceptionally low interest rates. There is not the slightest sign that there is any change in this situation, but if stock markets fell (as is likely) that demand would only increase.
Seventh, we know that the macroeconomy is not like the microeconomy: it need not balance its books.
Eighth, we know austerity killed. To be precise, it probably killed more people than Covid 19 will, and the lack of preparedness it left us with probably killed many who have died of Covid 19 as well. And no one wants to go back there.
So how to reconcile all this?
I note three things.
First, that the Treasury is simply noting cost. It is not saying what else to do, although I am sure that behind the scenes it is.
Second, to note that unless the government wants to be associated with the excess deaths (which it is clearly desperate to avoid: its whole new strategy being to blame us for it by not 'staying alert') then those costs will continue.
Third, that the Treasury is not talking about investing its way out of this. It is planning to cut out of this, which is known to never work.
And what all this means is that if the Treasury view prevails we are in deep, deep trouble.
What we need instead is a plan to deal with this.
First, markets have to be told, challenge us if you dare, but we'll nationalise you as and when you need a bailout (as will certainly be required before this is over) if you do. Take the markets on politically, in other words. Call them out, not give in to them.
Second, do not, even for a second, plan spending cuts: everyone in this country now realises how dependent we are on public services.
Third, do not think for a moment about tax rises, overall (whilst increasing wealth taxes, corporation tax reform and other measures to make sure that those who should pay do).
Fourth, do plan massive quantitative easing.
Fifth, do plan the investment needed to get the economy to working, sustainably, again. That is the Green New Deal.
And sixth, explain that the government is not constrained by a lack of money, because it can make all that is required and that none of inflation, a sovereign debt crisis or a crash will happen.
Seventh repeat six.
Eighth, repeat seven.
This can work. It will work.
But balanced budgets, tax increases and cuts are the surest way to economic and social disaster that can be imagined, and would repeat the 1930s all over again.
Unless that's what the Tories want they would be following my advice.
We'll know what they want by the decisions that they make.
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Good stuff!
May I please have a pound for everyone anywhere who says ‘someones got to pay for it’ (I read that article of yours too).
I wouldn’t mind one either
And if Mondays blog comes to pass then without the income from Scotland!
https://www.taxresearch.org.uk/Blog/2020/05/11/for-how-much-longer-can-scotland-stay-in-the-union/
In the ‘Third’ of your action plan – Tax rises not Tax cuts
Changed – thanks
The arithmetic suggests a wish to “pay it off” in five to six years, like that was necessary.
The mindset suggests the Treasury continuing to think it is spending money rather than creating it.
As for what you say about the government and the Treasury telling things to markets, I fear you have the wrong end of the stick. This government believes its role is to take orders from “the market” not to give them.
Roy S Grey says:
“The arithmetic suggests a wish to “pay it off” in five to six years,….”
I seem to remember George Osborne making similar specious claims about the aftermath of 2008. Unsurprisingly ten years of austerity sees the debt bigger and the nation in a worse position to deal with a real crisis such as a pandemic.
Can anyone explain how it is that the Conservatives have a reputation in the public / media perception for sound financial management ?
I hope you heard me in Bbc Radio Scotland just now
can they really be saying NHS “heroes” with one side of their face and “pay freeze” with the other ? Are the people really going to fall for that ?
No….they’re not
I was watching Piers Morgan on GMB this morning and when it cam to it, Annelise Dodds doesn’t inspire hope either.
I admit I like Annelise but she’s no orator
Great article. Treasury don’t know what they are doing and/or the only tool they have is a hammer & thus every problem is a nail.
You comments about their focus on budget deficits etc suggest that like a gramaphone record, they are stuck in a “back to the 1930s” groove.
Apologies for the mixed metaphores. The mounting death toll, the large number of unemployed suggests that their “classical thinking” could be overturned by events.
We shall see.
So the govt wants to hike taxes and at the same time cut even more public services – good luck with that. The problem is no one in govt or any politicians of any standing is going to say we can afford anything in our currency.
I had the same argument on twitter and the guy was raving about foreigners supposedly abusing the nhs, by coming here to get free treatment etc. I told him it does not matter as the govt can afford anything it wants in the £, no tax rises needed or bonds. Yes i know about taxes but that is a separate issue, the point i made to him is no taxes funded the recent £300 bn furlough scheme. The guy replied well bonds and gilts did, so my answer was were did the gilt and bond buyers get the pounds to buy them? The answer of course is either a private bank sanctioned by the bank of england or the latter.
What this meant was every £ that is in existence in the uk economy or in other government and private hands was created or allowed to be created by the UK govt. That is how the bond buyers paid for the gilts/bonds etc. In other words the £ existed before the gilts, bonds, and taxes did, they always did, The answer was silence and he stop slagging off foreigners for supposedly bankrupting the nhs.
If more cuts and tax hikes come expect the country to go further to the right and i mean fascism with a big brown shirt on it. Some one will seek to blame the other instead of the real culprits – the government.
May be that is what the tories want.
“…fascism with a big brown shirt on it. Some one will seek to blame the other instead of the real culprits — the government….
May be that is what the tories want.”
I don’t believe they do, but if it’s the only way they can deflect the blame for the mess we’re in they just might go for it.
I don’t know if it’s possible to imagine that wreaking destruction on society is not the intention of the government. The public seem to be remarkably good at denial. I can sort of see how you can remain in denial about various governments’ wanton abuse, destruction and plundering of foreign countries. After all it’s being done to someone else. But to remain in denial when that plunder and abuse is being directed inwards, it seems crazy.
If the Tories are not deliberately intent on causing harm, they must be astoundingly stupid. I suspect they are both – malignant and ignorant. Whichever is the correct reading, I am feeling very nervous. Every time I hear someone asking – how will we pay for it? I am flooded with despair.
I will be addressing that question on Radio Scotland this afternoon
That’s interesting, what is the programme called?
Their drivetime programme
Scheduled for 4.35
BBC Radio Scotland
Hopefully you will be able to counter the view of the Scottish Secretary of State who was on Radio Scotland this morning making comments like
“the chancellor will have to look at how he puts the UK’s finances back on a “sound footing” once the Covid-19 pandemic is over.”
and even worse
“As we’ve learned, at some point you have to pay your debt back.”
I’m also flooded with despair!
I will be flatly contradicting that!
Here is a link to your discussion on Drivetime (BBC Radio Scotland) this afternoon.
Your contribution runs from 45:25 – 52:45
https://www.bbc.co.uk/sounds/play/m000j1v3
Many thanks Ken
The Treasury appear to want to repeat the mistakes of the past. They could at least try making new mistakes.
But isn’t one of the tax raising suggestions to further restrict tax relief for pension contributions, say at the basic rate? I thought you might have supported that.
Another might be to abolish the Upper Earnings Limit/Upper Profits Limit for national insurance, which would effectively increase the tax paid by employed and self-employed higher and additional rate taxpayers by 10% each but leave basic rate taxpayers the same.
I have argued for redistribution within the framework of overall tax cuts
I have not argued for overall tax increases
Surely that’s been clear?
The ‘Treasury View’ in 1929 was that public expenditure to relieve unemployment wouldn’t work, because they claimed there is a fixed fund of saving to fund investment – jobs gained from public works would be matched by jobs lost as a result of reduced foreign investment.
As Joan Robinson remarked: “Soon the world slump set in. The total bankruptcy of orthodox theory became evident to all but its professional devotees.” (Economic Heresies, 1971).
Today’s Treasury view as revealed in the leaked document may take a different form, but the consequences would be similar.
Hopefully the bankruptcy of this iteration of orthodox theory will become evident before the 1930s experience is repeated.
Essentially the country is clueless or rudderless in regard to the beneficial use of its monetary system. Now trade talks with the United States reveal Britain will have to sign a “Non-Market Poison Pill” to stand any chance of getting a trade deal. So much for Britannia Unchained. More like extra shackling!
https://www.theguardian.com/politics/2020/may/12/us-message-to-britain-in-bilateral-trade-talks-its-us-or-china
https://business.financialpost.com/pmn/business-pmn/trudeau-affirms-china-trade-aspirations-after-usmcas-non-market-requirement
… trying to work out who is pushing which agenda….. and who will win.
Is this REALLY the Treasury’s policy recommendation… or just one of many scenarios they are exploring? Who decided to leak?
It is possible that the Treasury is SO ingrained with what they consider “orthodoxy” that they feel compelled to fight a rearguard action against what they see as unending fiscal incontinence.
More likely, it is a bitter fight within the Tory party. The ERG crowd are still there and they are not solely focused on Europe, they also have a domestic agenda, too. They hate the current state intervention and we are already seeing them snipe at the current arrangements. Indeed, I suspect that Boris was strong-armed into making what was clearly a premature broadcast on Sunday. He was told that he had to produce a path out of the current lock down and “quick, sharp” or see some sort of rebellion.
There is a more pragmatic stream of Tory-ism and that has (despite incompetence, a late start and extremist ‘colleagues’) been in the ascendancy for the last couple of months…. but that appears to be coming to an end.
So, in short, I don’t think we should blame the Treasury (too much) it is the Tory Party that is driving the process…… and it is Labour’s duty to push back hard. I live in hope.
A lot of sense in this. One always has to ask of anything one reads or sees in the news: “In whose interest has this been written/broadcast/leaked?”
As an aside, Dom Cummings’s campaign to string up any leakers is going well, isn’t it?
The Daily Telegraph argument (which is after all, a Conservative Government, or at least a Conservative neoliberal, mouthpiece) is that a cumulative deficit of “£1.19 trillion over five years …. would require up to £90 billion in annual tax rises and/or spending cuts over the next few years”.
It is incumbent on the Telegraph to present and explain the principles of the geometry of legitimacy that underpins this remarkable and exact relationship claim, that ties the outer limit of fiscal responsibility mathematically with such precision to £90 Bn of tax rises, as a function of £1.19 Tn debt. I suspect some economists could have a very jolly ‘field-day’ with that equation. Similarly, it is incumbent on the Telegraph to demonstrate the precise quantification of the element of debt that projects that debt into causing a “sovereign debt crisis” and the precise nature of that element of debt that is the particular source of the problem; then explain why nothing has been done to reduce that element of dependency in the British finances since 1976, if the status of this debt has the critically dangerous and natural character of inducing a sovereign debt crisis, that they claim. It speaks to gross Government negligence over many, many years. Indeed, I think even a typically louche, lazy, laissez-faire Conservative of the kind that so often have filled Conservative benches, would accept that 44 years is long enough even for Conservatives to fix the problem, if there is a problem.
The Telegraph then, and only then, still of course has to justify the legitimacy of the basic claim that there is a problem of sovereign debt that requires to be fixed. This is not my problem, but it is the Telegraph’s, because this is what they believe is the intrinsic nature of the national debt; so let us follow their logic through. Let us suppose that the Telegraph can pass this, and all these tests. I grant that as the starting point, for the sake of the argument only.
The Telegraph then has to explain precisely what should be done about this element of debt, to ensure that Britain is never placed in this position of facing an exogenous sovereign debt crisis ever again; because it is not only a concern; it is a basic necessity of government that this form of threat is removed from Britain, permanently: and no excuses. It should never have been there; which the Telegraph is also required to explain. It is after all the Telegraph that has chosen to select this issue of sovereign debt risk for special attention. Physician, heal thyself.
A sovereign debt crisis is a serious threat to the security of the nation. The security of the nation is the first priority of the State. If ‘taking back control’ actually means something, and is not merely a cheap, meaningless PR stunt used to mislead people, then the prospect of Britain possessing a structure of national debt that actually allows the threat of sovereign debt crises, brought on by foreign interests, known or unknown, or at the whim of financial adventurers, should not be allowed to exist; and should never have been allowed to reach the level of a threat before they were snuffed out by rigorous legislation, regulation and forensic, sleepless scrutiny. Under the assumptions of the Telegraph’s monetary economics there would be a cost in doing this, of course; which it is also incumbent on the Telegraph spelling out. Allow me to help; it is called ‘the real price of taking back control’.
Well argued
Have a coffee…
My half-shot latte isn’t available, so I will have to settle for a very austere filter, with cold milk. I think I’ll now rename it: a lockdown-latte. Cheers.
🙂
Very well done on Drivetime!
Have a well-deserved coffee ….
Thanks
I tried… I need the coffee
It’s been a gruelling two days
Brilliant job Richard.
My wife made an interesting comment this morning, that the Telegraph is being used to sound out public opinion before any “policy” decisions are being made. A sounding board for the Tories.
If they do follow through with this I fear revolution. Surely they don’t expect us to sit back and see the very people that have nursed and sustained the sick and needy, punished financially for their efforts on our behalf. It is scandalous. They should be paid more.
How do we PR a counter voice to this dated, archaic drivel? Your blog is brilliant and there is informed agreement for the challenges and opposing strategies that you have presented.
Could we “simplify” these arguments for a wider audience and pay for space – in the Telegraph(?). I would willingly tighten my belt and make a significant financial contribution to the costs. And how could we lobby Starmer & Co to embrace these progressive ideas and adopt them with some vigour as the main opposition to Boris and his chums.
There is a sort of arrogance at work here. During Jeremy C’s turn as leader we had no opposition. I really think the Tories believe they can do what they like.
How can we prove them wrong? Question for tomorrow?
Hmmmm….
Thoughts?
I’m not sure paid ads do that much good, but…
“Sixth, we know there is a massive demand for sovereign debt”
Do you have any evidence for this?
All issues are being heavily oversubscribed in the UK and elsewhere
It’s really not hard to find the evidence. It is noted, regularly, in the FT
Yes, 50 year UK debt yields less than 0.5%
Yes but that has a lot to do with QE? Or did, or maybe the world thinks deflation is upon us
That is an interesting question. Where would infaltion come from? Given anything from 10%-40% falling out of GDP over the next few months, why would deflation not be a possibility? And if taxes go up soon?
Only government spending will prevent deflation – buy transferring money to people
What I cannot understand as regards to government debts and deficits is that in the forties we were able to defend our country with an ultimate debt of 250% of GDP and were able to harness the sufficient resources, with the help of others, to defeat the enemy. Post war we created the NHS, built houses and nationalised the railways etc with a continuing government debt that was well above what we have today and, likely, post coronavirus. Japan has run a debt of 250% of GDP for the last twenty years or so but continues to provide the resources that enables their society to function. Currently, ours is about 67%, net of QE.
And of course we could do all that as well now
I understand that China has run a government deficit of around 14% of GDP every year for the last 30 years, during which they have never had less than 6% real growth in GDP, very little inflation and no recessions. It seems it takes a communist to understand how money works in the capitalist system. 🙂
Mind you in the 1970s Economics 1 at Moscow University was based on the obligatory Paul Samuelson ‘Economics’ textbook on the basis that ‘you need to understand your enemy’. In Samuelson each chapter starts with an extract from literature and in one chapter he quotes Lewis Carroll – “The time has come the walrus said, to think of many things, of brown paper packages and sealing wax, of cabbages and kings’. In the Russian edition they put a * against walrus and a footnote ‘Walras, P. – Bourgeois French economist of the late 19th century’.
Tim wrote: ” It seems it takes a communist to understand how money works in the capitalist system.”
Yes indeed. When the 2008 Crash happened, the Russians closed their stock exchange until the worst had blown over to prevent massive losses and speculative intervention, whereas in the West markets stayed open while billions were wiped off of share values, pension funds and personal savings were put under enormous pressure, speculators cleaned up and disaster capitalists, often the same speculators, picked over the carnage like vultures to make further fortunes out of other peoples’ misfortunes. It seemed to me at the time that our western markets had been designed by spivs to rip off the hard-working suckers.
Too true
It’s not part of the National Wealth Service
@ Tim Rideout Love the concluding para!
But also on
“It seems it takes a communist to understand how money works in the capitalist system. ”
I agree entirely and I’ve argued similarly
http://www.progressivepulse.org/economics/chinas-lessons
Just watching ITV 10 o’clock News. Has Preston got it? He reported that there is no need for austerity as the BoE stands ready to buy up all the government’s debt and will sit on it. Will now stay up and watch his interview with the BoE governor on Preston.
I tried to find a clip and couldn’t – and by ten I am whacked!
Here is a link to the programme on the STV Player (I am in Scotland). The interview with Andrew Bailey starts at 9 mins 25 into the programme. You will probably have to sign up to the player first but that is dead easy.
https://player.stv.tv/episode/3xjz/peston
If the Tories do decide to go for a massive program of austerity to pursue the fiction of “balancing the books” they’ll almost certainly lose the next election. In fact that’s looking more and more likely as the Boris hype unwinds. He wasn’t my first choice for leader but I’ve been impressed by Keir Starmer so far, and I think Labour could be heading for a 1997-style landslide (even if they can’t win in Scotland). We’re still a long way out from the next election but that’s how it’s looking to me at the moment.
I will be making this point this morning Howard….
He was the master in the Commons yesterday
And expertise is back in fashion
Hi Richard
Please elaborate on this
“First, markets have to be told, challenge us if you dare, but we’ll nationalise you as and when you need a bailout (as will certainly be required before this is over) if you do”
What do mean by ‘challenge’ ? . Are you envisaging foreign exchange dealers conspiring to cause a ‘run on the pound’ ? How would a government go about ‘nationalising’ ( say) a foreign bank ?
It is well known that conspiracies have occurred
Banking licences can be withdrawn
But let’s be candid: there will be no bigger run than that caused by Hard Brexit
And that is unavoidable
I generally agree but I do think you maybe are not mentioning that while we sure can do quantative easing the country may well see the value of the currency fall quite dramatically. The old empire countries, UK, France, Spain, Belgium, Italy, Russia, US, China are most seriously impacted. All these countries have to a large degree rested on their old or new empire laurels and lived well beyond their means ecologically and economically (well possibly slightly different for China and Russia) . We have been able to fill our hospitals with staff from poorer places, even Greece and Spain and Portugal during their debt crisis let alone the rest of the world, We may lose are huge advantage. That is okay but I think important to admit this as well
OK Chris: if our currency falls whose is going to rise given that everyone who can is doing QE, including the EU to a greater degree than we are?
Please tell, and why, as I can’t see how you can predict that and what basis
Nor did it happen last time: our fall is wholly down to Brexit
I certainly agree it is in large part to do with Brexit. However, our bailout to employees and self employed is more generous than anywhere else and for longer. Due to the high salaries we pay compared to elsewhere outside of Europe our debt will be growing quicker than elsewhere. Our overdependence on the City of London, dependency on imports and outdated infrastructure puts us particular risk. The overvaluation of property will bite. I therefore surmise we are at high risk of a bigger fall than others. Added to that the high chance of a second wave of corona putting us back further and it does not seem good to me.
Economic forecasting is only created to make astrology look good so I can’t prove it, however, I did write the occasional article in Sustainable Economics magazine going back to the late 90’s ( https://archive.sustecweb.co.uk/) where just about every writer predicted the crash of 2008 and the stupidity of Blair in handing over the power to set interest rates to the BoE monetary policy the day he was elected and before Parliament even sat. It clearly showed to me that day we had bought a damp squib completely controlled by what bankers wanted and needed. Ho hum
Chris
You are wrong: the I bet rational comparison is that we are spending less than most one bailout
And high salaries? Pardon? Where the heck did you get that from? We are poorly paid.
So I have to say some of your current arguments do look to be wrong
Sorry…
Richard
Compared to nearly every country in the world, 200 of them. Virtually no-one is getting are getting 80% pay till October of £20,000. Most countries do not have wages like that other than some European one’s. To get that for not working when 6 billion people never get that is to me is going to result and in great equalisation. I agree it is patchy in outcome and many on zero hour contracts may not be getting anything other than UC and housing benefit. However as you say I am wrong there is no point on carrying on discussing this as you are so self certain.
The IMF and OECD think our support lower than average
You re picking on one issue out of several