This time Boris Johnson’s optimism seems well placed. He said this week that he expected the economic bounce back from Covid-19 to be “much stronger” than many expected. I agree, and I haven’t seen the forecasts which the Office for Budget Responsibility will publish tomorrow.
In general, across the western world, that’s the case. In part that is because of the overwhelming firepower which central banks and treasuries have thrown at this crisis — at a speed and with political unanimity we didn’t see last time. For all the talk of division, the US Congress has backed rescue packages and the eurozone has acted as one. Here in the UK there was no argument about moral hazard — everyone agreed that the Government had to step in to help businesses facing ruin and people facing unemployment through no fault of their own.
It’s also the case that, historically, pandemics have been much easier to recover from than banking crises. It may not feel that way to a restaurant or conferencing business or outdoor activity centre, or the many thousands added to unemployment rolls. But this time we don’t find ourselves in the catastrophic situation we did a decade ago when the very arteries of the economy — the credit channels — were blocked and would take years to clear. Nor is this the permanent impairment to trade that an event like Brexit represents. Covid-19 will pass.
The great news from the Health Secretary yesterday that vaccines are working at reducing hospitalisation and death rates here in the UK holds out the prospect that there is an end in sight across the world. This is reflected in stock markets, which in places like the US are higher than their pre-pandemic highs.
So now we need to listen to Larry Summers. Really? You wouldn’t have heard me say that a decade ago. Back then, Summers was the chief economic adviser to Barack Obama and he was telling us we needed to spend more money. Although we disagreed, it was hard not to be impressed by the sheer force of his intellect — and self-confidence in it. As it happens, despite the rhetorical clash of stimulus and austerity, both the Obama administration and Coalition government here followed near identical fiscal paths over the first five years of this decade. So what is Mr Summers saying now?
He says we risk spending too much — especially in the US. There the Biden administration is about to spend the equivalent of £1.3 trillion, on top of a huge package passed in the last weeks of the Trump presidency. I was pleased to see the new President elected, I know his economic team and I can see why they want to act decisively and before the political window for action closes on them. Still, it’s a staggering sum of money, and it doesn’t just plug the hole in output now left by the pandemic — it’s three times bigger than the hole. Most of the money goes straight into people’s pockets to spend, many of whom have already been saving money this last year. Summers warns “there is a chance” that spending on these levels “will set off inflationary pressures of a kind we have not seen in a generation”. Most of us have forgotten the pain of inflation — although I got a short, sharp reminder in 2011 when it hit five per cent and gave me the hardest time of my chancellorship.
Britain is especially exposed to a bout of inflation. Already the yields on gilts are rising — i.e. the interest rate we pay on our debt is going up. More of that debt is index-linked than our peers. If inflation goes up, the Treasury will have to find many billions of pounds extra a year just to service our borrowing — dwarfing the budgets we spend on some public services.
Rishi Sunak knows this, and knows it could derail the Government. He’ll keep spending through the tail end of lockdown, but then he’ll start to turn the spending taps off. He’ll raise taxes too, as I had to. I chose VAT while he’s reported to be looking at business tax. But all taxes are ultimately paid by individuals. However he does it, we have to start repairing the finances so we’re ready for the next crisis. If we hadn’t 10 years ago, we’d be in a far bigger mess than we are currently. Now we can see that the sun is going to shine, we have to start fixing the roof again.