Inflating the debt away also seems tricky as central bankers around the world have been desperately hunting for some inflation, anywhere, for years. Despite a surge in the money supply to fight the pandemic, advanced economies are fighting secular trends like population ageing and a glut of savings pushing down on equilibrium interest rates.
Even if such an approach was feasible through some dramatic tearing down of the monetary framework – for example, a move to overt monetary financing and ending Bank of England independence – then the genie would be well and truly out of the bottle. At a point when the UK is selling more than £400bn in gilts a year, and rolling over existing borrowings, it seems outlandish not to expect the bond markets to exact a premium punishing enough to turn an economic catastrophe into a full-scale meltdown. Lest we forget, higher inflation also puts up the Government’s spending costs, as well as chipping away at its debts.
That brings us to austerity. A wide-ranging study by three Italian economists, Alberto Alesina, Carlo Favero, and Francesco Giavazzi, put Keynesian types on the back foot last year with their research of austerity programmes in 16 countries. Their book concluded that spending cuts were far less damaging than tax rises and not necessarily damaging at the ballot box either; witness Labour’s defeat in 2015.
But in Boris Johnson we have a prime minister who doesn’t even utter the word. The PM’s love of a grand projet, from cable-cars and (aborted) garden bridges to airports and even bridges to Ireland, is one of his defining characteristics. In any case the likely post-Covid unemployment crisis will need jobs – indeed entire new industries – to be created. The private sector should lead, but the public sector will have to pump-prime the investment.
After Covid-19 and a brush with his own mortality, forcing through public sector pay squeezes would also be political suicide for the PM. Remember Theresa May lecturing nurses that “there’s no magic money tree” in 2017, and beware. The ending of the triple lock on pensions seems a more probable route, but again comes with political costs.
Let’s also rule out the cancellation of the £735bn in bonds bought by the Bank of England over 11 years of quantitative easing. Tempting though it may be, the Bank’s chief economist Andy Haldane told the Telegraph in May the “optics of that are absolutely horrific”, adding: “I don’t think bankrupting your central bank and having to recapitalise it is a good look right now.” Quite.