There will be no austerity or tax hikes...Probably

Reports are circulating that we are in for years of austerity and tax hikes. I think the reports are wrong, probably.

Article updated: 15 May 2020 12:00pm Author: Michael Baxter

Even before a Treasury Report looked at the possibility of more austerity and wage freezes for public sector workers, there were plenty who thought this was going to happen anyway.

The logic is simple enough. The government is spending money at an unprecedented rate. It has got to be paid for somehow, and it will be paid for in the form of austerity. What the government gives now, it will then take away.

Then a Treasury report said much the same thing and already there has been a storm of protests.

But the Treasury is meant to look at options. It is meant to consider different scenarios. Just because a report looked at one approach, it doesn’t mean that approach will be adopted.

Furthermore, there are reasons to think the government can afford its debt without caving into the fiscal hawks.

Interest rates

Part of the issues relates to the interest rate it can borrow at. Right now, it can borrow over ten-years at just 0.21 per cent. In short, it could borrow a trillion pounds and annual repayments would be just £2.1bn a year. Or the government can borrow over 30 years at 0.58 per cent (annual payments on a trillion pounds — £5.8bn).

In fact, the budget deficit for the year is expected to reach around £300bn. You do the sums; the interest is modest.

Furthermore, a lot of this debt will be incurred to lend money to businesses — so theoretically, it will increase gross debt, not net debt. The increase in net debt will be much lower.

I know what you are thinking, 'but it will have to be repaid eventually'. Well, when is eventually exactly? Some debts incurred to fund the Napoleonic War have only just been repaid.

What matters here is the size of the economy at this future date that we call eventually. Well, if you believe in the economic potential of new technologies that are being developed, then the economy will much bigger, eventually, too.

Borrowing next year

The challenge, post-Covid, or so I believe, will be the huge levels of unemployment. I also think the acceleration to digital technologies brought about by this crisis will lead to increases in output by companies without corresponding increases in employment.

So we may be in for a period of higher unemployment. This will limit government tax recipients just at the point when the economy will desperately need a stimulus.

As a side argument, I want to make a comment about Keynes — the great economists of the pre-WW2 years. These days there is a lot of hate addressed at his ideas. I don’t think the haters understand his theories. Keynes believed in governments applying certain measures to stimulate the economy at times of chronic lack of demand. He predicted the Great Depression. His ideas are a good fix under certain circumstances. In the 1970s, 25 years or so after he had died, so-called Keynesian economics was applied in circumstances where there wasn’t a lack of demand. And ever since then, Keynes has been vilified, including by economists with a political agenda which is such that they have chosen to ignore the point about ‘certain circumstances.’

Post-Covid, those circumstances when demand is less than potential supply will be upon us again.

Will the government be able to fund more borrowing to create a stimulus, without running up uncontrollably high levels of debts? Actually, what matters is borrowing to the size of the economy. Providing growth in GDP is greater than government borrowing to GDP; it can borrow to stimulate the economy without increasing the ratio of public debt to GDP.

International situation

Of course, the UK’s position is not unique. Indeed it will be hard to find many countries across the world that are not in a similar boat.

In the past, when a country stimulates its economy, its currency crashes. Well, this won’t happen if most countries across the world are in stimulating mode.

Such stimulus can backfire when some countries don’t play along. I worry about the fiscal hawks in Germany. If they have their way, and the likes of the UK and US stimulate their respective economies, then high exporting countries that keep tight reins on government spending will effectively freeload from other government’s spending.

Such a development won’t be popular.


My big fear relates to a reversal of globalisation. Just as Covid-19 is analogous to Spanish Flu, I fear the economic response post-covid, will be analogous to the economic response post WW1 — Treaty of Versailles, the disaster that was League of Nations and attempts to create international institutions, and then protectionism (Smoot Hawley Tariff Act in 1930.)

If those things happen, then the economic consequences will be horrendous, austerity and public sectors pay freezes will follow, and resulting social discontent could fuel either revolutions or wars across the world.

I look at this in the context of new technologies in my new book, out in June — Living in the Age of the Jerk.


A key measure to watch will be inflation. If it stays very low, central banks will be able to monetise debt without sparking off inflation. So I will return to this next week when we get the latest data on UK inflation.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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