The way to deal with our high debt ratio is to live with it, allowing sustained economic growth to bring it down gradually over time – if you can. Fortunately, we in the UK are well placed to do this. Interest rates are low, the average maturity of the debt is very long, default risk is zero and, after the virus, sustained economic growth should resume. But not all countries are so well placed.
Admittedly, even such a policy needs to be accompanied by some fiscal restraint. Economic growth will not bring the debt ratio down if every year new borrowing keeps adding substantially to the stock of debt.
So, at some point, the deficit will need to be brought down, preferably to about zero.
The time to do this, though, is when the economy can absorb this fiscal tightening while sustaining full employment. This may be because private sector demand is buoyant or because extra private spending can be successfully encouraged through looser monetary policy.
Neither of these conditions holds today. But before too long demand may be sufficiently strong to absorb a fiscal tightening.
Some analysts have suggested that there is a completely painless alternative: have the central bank buy all government debt and then cancel it. This sounds too good to be true but it isn’t daft.
We owe debt to ourselves anyway, so why torture our economy in an attempt to bring the debt ratio down? We have already gone partially down this route since the Bank of England now holds almost 40pc of all UK government debt. This has not been cancelled but the debt has in effect been suspended. So why not go the whole hog?
The problem is inflation. Already the Bank has pumped up the monetary base massively. If it bought all the remaining government debt it would probably cause a huge expansion of the money supply. Then we really would risk an inflationary upsurge of Seventies proportions.
The combination of economic growth and a tight budget is how we brought the debt ratio down during the 19th century, after the Napoleonic Wars drove it above 200pc of GDP. And that was without the “benefit” of inflation.
After the Second World War, we brought the debt ratio down from over 250pc of GDP, again through this same route, helped by a dose of inflation, kept moderate until the Seventies.
I believe that we can manage to pull off something like this again, without resorting to higher inflation. But if the choice is between a higher inflation rate and a raft of massive tax rises and spending cuts, I think I know which way most of the policy establishment would incline.
Roger Bootle is chairman of Capital Economics