19 November 2021

A Churchillian answer to the Covid debt

By Eamonn Butler

State spending is the highest it’s been since the 1970s. The tax burden is the highest it’s been since the 1950s. Government debt is at record heights too – twice as high as 20 years ago as a percentage of GDP, and seven times as high in cash terms – over £2 trillion, or around £72,000 per household. Yet still the Government plans to spend more, tax more and borrow more.

With debt like that, you can see why the Government might give up on the idea of ‘balancing the books’. First, a £2 debt is a problem, but a £2 trillion debt is a statistic. What difference would the odd £200 million (or £200bn) more make? Second, £2tn is such a huge number, that ministers (who won’t be around forever) might see no point in even trying to curb it. And third, a lot of this debt is due to Covid, which they see as just bad luck, rather than profligacy.

True, much is due to the cost of pandemic measures – furloughs, welfare, loans and lower lockdown tax revenues – maybe £550bn of it, or nearly £20,000 per household.

But if we really are committed to ‘balancing the books’, we need to isolate the Covid debt and treat it as the once a century war-type debt that it is, so we can focus on the real problem – the day-to-day public finances. We need to treat the Covid debt differently from our ongoing, ‘normal’ borrowing. That means accepting that it takes a long time to pay off the costs of wars and pandemics, and postpone the repayment of this exceptional borrowing until the economy is in far better shape.

Traditional government borrowing does not do that. It works by the government selling bonds – IOUs – to investors. In return for investors’ money, the Treasury promises to pay them a fixed cash sum each year for maybe 10, 20 or 30 years, and to repay the IOU at that point. But when you are talking of a very large sum – like £550bn – falling due at that particular moment, this is a very risky promise. You simply do not know how the public finances will be faring in precisely 10, 20 or 30 years’ time, and you might have trouble making the repayment.

No, as Gabriel Stein and I discuss in a new ASI paper, ‘I Owe You’, the best way to deal with the £550bn emergency borrowing is by issuing consols. This is exactly the way we have dealt with wars and national emergencies since the 1700s. Consols – short for ‘consolidated annuities’ – are government securities, like the Treasury’s normal 10/20/30-year bonds, but with no fixed repayment date. They carry on until the Government decides to buy them back. Meanwhile, just like normal bonds, consols pay their holders a fixed sum every year – maybe a little more than today’s 30-year bonds, say around £1.50 a year on a £100 bond.

The first advantage of this is that it stops Covid debt messing up day-to-day policymaking. Second, the Government does not have to worry about repaying £550bn any time soon – the Napoleonic War consols were only fully repaid in 2014! Third, it means no fixed term debt falling due at bad times. Fourth, it locks in today’s low interest rates: right now, £1.50 a year forever seems a reasonable return on £100, particularly for pension funds looking for secure and steady income – though this opportunity may not last much longer. Fifth, the annual payments on the debt – just over £8bn a year on £550bn – would stay manageable, especially if the economy grows strongly.

Ideally, the Government should have issued consols when the Covid costs first hit, and before all the talk of higher interest rates. But as its ongoing bond debts fall due, the Government could gradually convert the extra £550bn of those IOUs into consols – exactly what Churchill did with World War I debt in 1927.

But we need to keep consols special. They are for those rare emergencies, where you need to spend fast without thinking too much – not to push the Government’s profligacy on to our grandchildren and great-grandchildren. So, giving them a special name (‘Covid Emergency Bonds’?) and promising to repay them when the economy has grown by a certain amount would be good safeguards. Hand politicians what they imagine is a magic money tree and we would soon be drowning in debt with absolutely no hope of escaping.

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Eamonn Butler is Director of the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.