Government borrowing is at a record high. Next week’s numbers will show that net borrowing so far this financial year is around £150bn, and the Office for Budget Responsibility says borrowing for the year could exceed £300bn or over 15 per cent of gross domestic product (GDP), a peacetime record.
Modern monetary theory says this is no problem. Governments that can print their own money can never go bust. The only constraint on how much they can borrow is inflation – the danger that people won’t want to hold the money the government issues.
This is true. But we don’t need to believe it to be relaxed about big borrowing. Conventional economics also leads us to such a conclusion.
The government doesn’t need to issue money to pay for its borrowing. It can do better. Shorter maturity gilts now have negative nominal yields, which means it is even cheaper to issue them than it is to print money.
And for longer maturities, borrowing costs are negative in real terms. This means the government is being paid to borrow. It also means that the ratio of debt to GDP will shrink even with quite large deficits. Real yields on 25-year gilts are now below minus 3 per cent, which means that for every £100 the government borrows it needs to repay less than £50 in today’s money.
But isn’t even this £50 a burden on our grandchildren?
Not really. For one thing, they can pass it on to their own grandchildren, who in turn can pass it on to theirs. It is only in the past few years that the government paid off the debt incurred during the Napoleonic wars. And no, this isn’t a Ponzi scheme. The trouble with Ponzi schemes is that they run out of new clients and so run out of funding. The only way this can happen for governments is if we all stop having children.
What’s more, debt is only one side of the balance sheet: it’s amazing how even financially literate people forget this trivial fact when talking of the public finances. If the government didn’t borrow so much, we’d be seeing even more business failures and unemployment than we are. This would impoverish future generations because it would mean bequeathing them a lower stock of physical capital, intangible assets and workers’ skills.
Taking both sides of the balance sheet into consideration, it’s not clear that government borrowing does leave a burden for future generations.
Of course, you can tell stories of some times and places where it does. And some of those stories would be true. But not here, and not now. In fact, quite the opposite. High borrowing is necessary to sustain profits and jobs in the face of the loss of activity caused by the pandemic. It’s the cure, not the disease: the question is whether the government has administered a sufficiently high dose.
Yes, government borrowing of 15 per cent per year would be unsustainable if it continued for any length of time. But this is unlikely. Instead, government borrowing has been high simply because the lockdown has caused many of us to become forced savers, and if one sector is saving another must borrow – by definition. As our savings fall back to normal and activity recovers, government borrowing will fall. If this doesn’t happen, our problem will not be high borrowing, but the failure of the economy to bounce back.
Back in 1933 Maynard Keynes said: “Look after the unemployment, and the Budget will look after itself.” That’s as true now as it was then. We don’t need modern theories to tell us not to worry about government borrowing. Old ideas are just as good.
