This is a time of painful discovery about what really matters in our economy. I think we in the SDP need to argue hard that those lessons are not forgotten when the government’s bills start coming due. I’m tasked with reviewing SDP economic policy, and I want to press the case hard now that we need to meet those bills in a way which will allow constructive (rather than constrictive) post-virus economic and financial policies. A social democratic future must not be hostage to Covid’s bills.
We don’t know the cost of Covid-19 to Britain in terms of human life, lost production, jettisoned employment, bankrupties and financial erosion. But all of them imply an assault on Britain’s fiscal cashflows and national balance sheets probably unseen outside wartime. How we pay for it will frame the economic and financial environment for at least a generation. It is probably the single most important economic, financial and political decision we will live to see.
Disasters happen more in some places than others. They happen a lot in Japan, where I spent three years studying the economy. Over time, its governments have tried various ways of dealing with the hangover from disaster. They have some lessons to teach us.
Firstly we should recognize that our balance sheets getting trashed has nothing to do with economic and financial conditions and policies before the virus hit. We should not assume that the ongoing destruction will have anything ‘creative’ about it, as many are saying.
And just because of the random nature of the attack, it makes no moral or political sense, and certainly no economic or financial sense, to let Covid’s bills dictate or crab fiscal policies in the short and medium term. Coming out of economic lockdown only to embark on lasting fiscal austerity would be a ‘second wave’ of destruction all of our own making. We must resist it, and argue for imaginative fiscal flexibility.
I would suggest taking a leaf of Japan’s book, and establishing a distinct Covid-debt sinking fund, to be paid down over, say, 60 years.
In Japan, when disaster hits and ‘unexpected’ public debt balloons, the new debt is added what is called the Government Debt Consolidation Fund (GDCF). Public rules about how that debt is going to be repaid are then set in motion. The key stipulation is that the debts in the GDCF are to be repaid over a 60 year period. So, for example, if the debts in the GDCF amount to Y600 billion, then after 10yrs, Y100 billion will have been paid down out of government revenues (i.e. taxes or asset sales), whilst the remaining Y500 billion will be refinanced. Each year, then, nibbles away at the total, and within 60 years the GDCF will, notionally, be out of business.
In Britain’s case, the Office for Budget Responsibility (OBR) should be tasked to identify just how much this year’s Covid outbreak has cost the Exchequer, in terms of lost revenues and unexpected spending, unexpected debt. The OBR’s total should then be held by the UK Covid 2020 Sinking Fund.
By laying out an unambiguous but long-term plan to pay down that debt, the government acknowledges that fiscal responsibility has not been abandoned. It also acknowledges how the economic and financial shadow to be cast by the virus will be both broad and long – and escaping it will be, and should be, a multi-generational task. Most importantly, it divorces that question from the immediately urgent task of economic reconstruction once we’re out of lockdown.
The disastrous impact of Covid makes SDP’s economic policy of shoring up domestic economic, industrial and financial resilience more important than ever. We must be prepared to fight against the spurious type of ‘fiscal responsibility’ that would cripple our recovery and deepen the already wide fractures in our society post-Covid.