The Imaginary COVID Debt Crisis – The Real COVID Financial Crisis

Written by Econintersect Guest

— this post authored by Richard J. Murphy, Tax Research UK

Why we do not have a Covid debt crisis

There is much talk about the Covid debt crisis that the UK faces and the fact that this is going to require cuts after Covid.

This is not true. I explain why in my free eBook ‘Money for Nothing and my Tweets for free‘, but this is too important not to repeat the story again.

Please share this article – Go to very top of page, right hand side, for social media buttons.

Yellow Sunflower and Red Apple Fruits on Green Table by Jill Wellington, Pexels. Embedded message added by Econintersect.

Let’s look at the finances for the 2020/21 financial year, which are not yet finalised so these are estimated figures, as yet. I have used the Office for Budget Responsibility year-end projections for 2020/21 when doing so, plus QE data from the Bank of England. I know the ONS has issued slightly differing borrowing data now, suggesting the outcome a bit better than the data I used, but ONS data tends to be revised so I stuck with the OBR.

Doing so I got this data:

The spend figure covers current spending and investment.

Tax data should be obvious as to its meaning. Other income includes interest the government pays itself on the bonds subject to quantitative easing.

The data on the value of the bonds that the government owns as a result of the QE programme comes from the Bank of England. And, as will be apparent, that programme can either be seen as injecting Pound Sterling336 billion of new money into the economy in the year, or as cancelling Pound Sterling336 billion of bonds.

The net result was that actual borrowing did not go up by more than Pound Sterling19 billion in the year. It may have been less. And for reasons that I have explained here, that new money injected by the Bank of England into the economy can be completely costless into the future, entirely at the Bank of England’s choice. There is no requirement that any interest at all be paid on it.

In other words, Covid has been paid for. There is no residual cost. No one needs to be repaid for the new money created – and most especially for the new debt created, when Pound Sterling19 billion was an almost record low addition to the national debt in a year. There is, quite simply, no crisis to deal with. And that’s all because Covid was paid for with new money creation.

I am not saying there are no consequences of this new money creation: there are, in the form of increasing inequality. I will deal with that issue below. But there is no government debt crisis now. And there is no reason for cuts. Nor is there any reason to say that interest rates need destabilise the UK government’s spending programmes. All these claims are simple falsehoods.

So what is the Treasruy’s claim that we face a crisis all about? It is simply to suggest that we must have cuts because it believes that the government is too big in the economy. It thinks we do not want healthcare, education, a functioning justice system, measures to tackle climate change, action to create jobs or any other of the multitude of things that people in this country know are essential. What it thinks we really want is no borrowing, even though it cannot measure borrowing correctly, or price it appropriately.

There is here a fight for the soul of the nation. There is in play a battle between small-minded finance and social need. The trouble is that almost no one who should be on the side of social need is making the argument that I do. And that is what is deeply worrying, Almost all opposition parties buy into the Treasury view of the economy. No wonder we are in crisis.

The real Covid financial crisis is increasing inequality – which means the wealthy must pay more tax

As I have already explained above, there is no Covid debt crisis. The UK national debt hardly increased in 2020/21. And the cost of servicing the debt from Covid could be virtually nothing, if the government so chose. There is, in other words, no excuse for the government to impose ‘Cuts for Covid’ as if somehow the crisis needs paying for, when that is not the case.

This, though, is not to say that there isn’t an economic problem resulting from Covid. There most definitely is a real problem arising from the crisis. That is the result of the very high level of government spending during 2020/21.

That spending is explained by this chart of the so-called ‘sectoral balances within the economy. This version comes from the March 2021 budget forecasts from the Office for Budget Responsibility:

What this shows is which parts of the economy are borrowing at any time, and which are lending (which in these terms is the same as saving, because whether you appreciate it or not, if you save with a bank (for example) you are actually lending it your money, which they then owe back to you).

As is apparent, the government borrowed massively in the last year, and entirely appropriately so, and at no real cost because almost all of that was covered by money creation which need not have interest paid in it. The result was that all other sectors within the economy as a whole saved, with households doing more saving than anyone else. The House of Commons Library showed the change like this:

We do not know who precisely saved the most as yet: the data is not available. Past trends show, however, that the already-wealthy will have saved the most. The simple consequence is that inequality will have grown considerably.

The evidence of this is all around us. House prices are at record levels. And stock markets are pushing at all-time high levels.

The fact is that the money the government created to meet very real need during the crisis has to go somewhere if it is not taxed or claimed back through additional government borrowing – which it has not been. So it has gone into asset bubbles as well. And before it is said that most of the subsidy did not go to the wealthy, I know that is the case. But those who received the spending from the government, by and large, spent it, because most people on what might be called ordinary levels of income have what are called as high marginal propensities to consume – which means that almost all they get in income is spent again. We know that because they have very low savings:

The spend keeps going until it meets someone from a higher income bracket who need not spend it. Then it becomes saving. And that is what has happened during Covid.

As I have shown, there was massive capacity to tax wealth more in the UK economy before Covid because the effective tax rate on income is about ten times that on wealth, on average, meaning that when both increases in wealth and income are taken into account the true UK tax rate across income deciles is:

The wealthy can simply afford to pay more. This is not because there is anything to be paid for. There isn’t. It’s simply because they are wealthy and we need to tackle that inequality which is harmful to the cohesiveness of society.

I tackled this a year ago in my Tax After Coronavirus (TACs) project. I listed the options then. The posts on that issue included:

• There is significant room for wealth taxation in the UK
• The UK could tax wealth more
• The relationship between income, wealth and tax
• The TACS approach to wealth taxation
• Reforming taxes on wealth by equalising capital gains and income tax rates
• The need for an investment income surcharge
• Capping total ISA contributions
• Abolishing the personal savings tax allowance
• Restricting pension tax relief
• Abolishing higher rate tax relief on gifts to charity
• Reforming council tax

Other related data includes:

• Capital gains increase income inequality in the UK: the time to align income tax and capital gains tax rates has arrived

I stand by all those recommendations. We are creating a massive wealth imbalance in the UK that right now only more tax can address.

But, and I stress this very strongly: there is no reason for the government to save the resulting revenue. It has nothing to pay for from Covid. What it needs to do are three things:

• Reduce tax rates on those on lower incomes;
• Increase benefits;
• Spend more.

This is not paid for from additional tax: the additional tax removes the impact from the economy. And it really is vital that the left get its collective heads around this. Only then can we build the sustainable economy we need post-Covid.

This article was composed from two posts at Tax Research UK, both 21 June 2021:

• Why we do not have a Covid debt crisis

• The real Covid financial crisis is increasing inequality – which means the wealthy must pay more tax

.

include(“/home/aleta/public_html/files/ad_openx.htm”); ?>