I never thought we would reach the day where a Conservative government spends more money than I managed to squander during my first term at University. They say ‘money doesn’t grow on trees’ yet the government seems to be capable of plucking unimaginable amounts of money out of thin air. Compared to a general government deficit of £38.7 billion in the financial year ending March 2019, we are estimated to reach a gigantic £300 billion deficit this year due to a terrifying £200bn of quantitative easing (the introduction of new money into the money supply by a central bank) resulting in an increasing debt-to-GDP ratio. Whilst some may fear the consequences of ‘the magic money tree’, it is required to fund the UK government’s emergency measures to deal with the economic crisis induced by lockdown. However, this magic money tree is not boundless; it is only sustainable under a v-shaped recovery. Such extensive quantitative easing cannot continue forever, yet will be required if we prolong the existing of lockdown or re-enter a full one. This can only increase the severity of the impending economic crisis.
The soaring national debt is not encouraging. At the end of May 2020, government debt reached £1.95 trillion, 100.9% of GDP. This is the first time national debt has gone over the 100% mark since the financial year ending March 1963. It far surpasses the threshold of 90%, identified by the Harvard economist Kenneth Rogoff, with the help of Carmen and Vincent Reinhart, beyond which economic growth falters. Furthermore, it is the largest year-on-year increase in debt as a percentage of GDP on record, with debt increasing by £173.2 billion from May 2019.The OBR’s Fiscal Sustainability Report predicts an astronomical rise in the debt-to-GDP ratio to a minimum of 325% of GDP and a maximum of 525%. This rise in debt ratio risks bankrupting the economy and could only be remedied through drastic fiscal tightening policies. Policies that could ruin the economy if we fail to make a V-shaped recovery. A recovery that will not occur if we re-enter lockdown.
The crowding-out hypothesis states that the higher the national debt, the greater the risk of government default, thus the higher the cost of government borrowing. However, government borrowing has never been cheaper due to low interest rates. As our debt remains affordable for the time being, the government does not need to impose detrimental fiscal tightening policies, such as reduced spending and increased taxation.
Thanks to the lower interest rates we can focus on the more pressing effects of closing down the economy. 7.6 million jobs are at risk (permanently laid-off, temporarily furloughed, or experiencing reductions in hours and pay), with those in the lowest income brackets most vulnerable; half the jobs categorised as at risk have a salary of less than £10 per hour. Furthermore, between March 2020 and April 2020 alone the British GDP fell by 20.4%. During the global financial crisis, from its peak in February 2008 to its nadir in March 2009 (a total of 13 months), the GDP fell ‘only’ 6.9%. This is far worse than the financial crisis of 2008. Imagine the extent of the damage if we are forced to endure another lockdown.
The magic money tree is the lifeline of our dying economy. It is an extreme last resort, yet it is also saving us from the fatal crash that could be caused by lockdown. In June 2020, one in four workers were on furlough, a scheme which is estimated to cost the government up to £100 billion. The Eat Out To Help Out Scheme includes 129,000 businesses employing 1.8 million people, costing £500 million. The Self-Employment Income Support Scheme (SEISS) has seen 2.3 million claims worth £6.8 billion.
The magic money tree is not infinite. Even though the Bank of England is printing money faster than crowds stockpiled toilet paper in March, it has its limits. Andrew Bailey, the Governor of the Bank of England, clearly stated that “at no point have we thought that our job was just to finance whatever debts the government issue… that is not part of our objectives. I’ll be absolutely blunt about that.” Only time will tell the extent to which the Bank of England will go to fund the extraordinary measures taken to prevent an immediate economic crisis due to lockdown.
Quantitative easing can cause a dangerous surge in inflation, especially if confidence in the pound crashes. This is a hazard we need to avoid. The economy must first recover before the government can impose tightening fiscal policies to retrieve the excess money in circulation. Currently, we are extremely reliant on a v-shaped recovery that would not allow the government to slam the brakes on the economy again. Therefore, the best way to recover our economy is to let our health system cope with the virus. By performing widespread testing, removing trade restrictions on medical supplies, spending on the health system, developing herd immunity, and most importantly finding a vaccine the UK will be able to resume previous levels of economic activity. The virus never overwhelmed the NHS. The Nightingale hospital in London, for example, was filled with empty beds at the peak of the crisis whilst we were ordered to stay home. Now the peak is over, there is empirically no need for us to stay home again.
Due to an increase in testing, numbers of daily cases are similar but death rates have fallen rapidly. Out of our entire UK population, less than 0.07% have died from COVID-19, a number which inexcusably includes anyone who has contracted the virus at any time even if it is not the cause of death.
People die everyday; it is an inevitable tragedy of human life. We cannot prevent death and, ultimately, we have to consider the trade-offs. Our economy is in grave danger. It is our livelihoods – our jobs, our homes, our food, our social life, our healthcare – that we must protect. The myth that our economy is invincible, that it will always recover from a great depression, is false. We cannot stand by and passively watch our means of living crumble.
You may disagree. You may think we should do whatever we can, whatever the cost to eliminate the virus. After all, I am speaking from the privileged position of a healthy young person and cannot imagine the fear of those at risk, and of their friends and family. However, a strong economy is vital for treating and caring for the vulnerable. If we sacrifice the economy, we sacrifice lives.
The magic money tree is preventing a catastrophic economic crisis, far surpassing the crash of 2008. I fear most for when the roots of the tree dry out, for when there is a reduction in quantitative easing, for when the cost of debt becomes greater. For now, one thing is absolutely clear: we cannot afford another lockdown.
The views in this article are the author’s own, and may not reflect the opinions of The Liberty Club.
‘The magic money tree – what can possibly go wrong?’ – The Spectator
Public Spending – ONS
‘How worried should we be about national debt?’ – The Guardian
‘The Economic Consequences of Mr Sunak’ – The Telegraph
Self-Employment Support Scheme – gov.uk
Deaths registered weekly in England and Wales, provisional: week ending 24 July 2020 – ONS
‘How does the ‘eat out to help out’ scheme work?’ – The Telegraph
‘More than one in four UK workers now furloughed’ – BBC
Coronavirus and the impact on output in the UK economy: April 2020 – ONS
‘COVID-19 in the United Kingdom: Assessing jobs at risk and the impact on people and places’ – Mckinsey
Fiscal sustainability report – OBR