The Tories are nothing if not adaptable. The libertarian, fiscally hawkish right of the party will just have to suck it; they have nowhere else to go.
Hughes is no one’s poodle, and can no doubt be relied on to bring the required level of transparency and scrutiny to the Government’s management of the public finances. Yet he also provides intellectual support for the idea of sustainably higher public debt, as well as respectability to the monetary action needed to finance it.
This is just as well, because whether we like it or not, our Covid response is piling it on like no tomorrow. As occurred during the financial crisis, the public balance sheet is taking much of the strain.
But it is not just public debt this time around. Corporate sector debt is also ballooning, with firms borrowing to stay afloat. As some banks have already warned, much of the £21bn thrown around like confetti in “bounceback” loans will never be repaid. A public-relations nightmare looms for lenders. Although now 100 per cent guaranteed by the Government, it is the banks that are required to pursue borrowers for repayment.
Despite the dangers of moral hazard, and the unfairness of it for firms that ride out the crisis without resorting to government support, the Government should simply recategorise such loans as gifts. Conversion into equity isn’t practical when dealing with hundreds of thousands of microbusinesses.
Many firms will in any case struggle if permanently saddled with higher debts. It is through no fault of their own that they are having to sign up, but because the Government has shut down the economy.
A strong, principled case can therefore be made for debt forgiveness. However the Government plays it, much of this debt is going to end up written off regardless. Economic recovery will be faster if there is some kind of debt jubilee.
With larger companies, it would plainly be easier for the Government to take equity in lieu of loans, a God-given opportunity, some have argued, for conditionality in pursuit of the Government’s levelling up and green, net zero agendas.
The state aid being doled out by the lorry load in France and Germany already comes heavily tied up in such strings. The commanding heights of the economy finally reclaimed, or socialism in our time by way of Covid. Where Jeremy Corbyn failed, a simple virus seems fast to be succeeding.
Whatever. One way or another, much of the extra corporate debt looks set to end up back on the public balance sheet alongside the ever widening deficit. All this debt is in turn being steadily monetised. The Bank of England’s asset purchase programmes already amount to nearly a third of GDP.
Even higher levels of debt monetisation are being applied in the eurozone, Japan and the United States, with very little prospect of ever being unwound.
In accounting terms, such debt cannot be simply written off, as a bank would when a loan goes bad. Neither is default any kind of an option for a major economy.
Growth and inflation can be very effective in eroding debt, but ever since the financial crisis we have been struggling to generate much of either. The Government also risks a run on the currency if it admits to deliberately trying to inflate away its debts.
The bottom line, sadly, is that there is no such thing as a free lunch; we’d be in serious trouble if interest rates ever started to rise again.
Notwithstanding the Government’s manifesto commitments to spend more but not to raise taxes, hard choices will eventually have to be made between the two. Not immediately, obviously. We have to get the economy going again first. But eventually.
Which will it be? Pledges made six months ago while electioneering are, I fear, no longer worth the paper they were written on. The world has changed.