One country’s economic plan for 2021 will be conspicuous by its absence this autumn.
The likes of Germany, Italy and France are beginning to set out proposals to leave the spending taps on in 2021. Gridlock may have hit Congress in the US but that has not stopped the presidential candidates also laying out visions that will keep borrowing high.
Meanwhile, UK fiscal policy seems to be stuck in crisis rather than recovery mode. The budget has been scrapped and Rishi Sunak appears to be playing his economic plans by ear. Economists estimate the Winter Economy Plan unveiled last week was worth just £4bn – a measly 0.2pc of GDP even as a second wave strikes. Is the UK going it alone by keeping its powder dry?
“In France, Germany and generally across Europe, budgets are being published without delay,” says Fabrice Montagné, Barclays UK and Europe economist. “We’ve seen some very ambitious spending plans across Europe to not only address the pandemic, but also industrial policy, climate change and technological transition.”
The early part of the Covid crisis saw UK and European policy track each other closely. Economists praised the speedy and huge fiscal response by governments with furlough schemes protecting incomes and a raft of measures bolstering businesses.
Any worries about public finances were eased by ultra-low interest rates and central banks acting as a backstop, calming bond markets and snapping up huge amounts of government debt. Many economists believed spending big now would be less costly later by aiding the GDP part of the debt equation.
However, the debate in the UK appears to have shifted from big spending to tax hikes to rein in debt.
“The UK over-emphasises the need to rein in spending right now and revert to lowering the deficit, especially when there’s no problem with the UK’s financial stability and ultra-low interest rates allow you to sustain higher debt levels,” says Montagné.
“The US and Europe seem to buy into this view and take advantage of those low rates to start seriously investing. If you save the economy now, you can grow out of the crisis and reap the benefits of higher future wealth levels to repay newly issued debt.”