We have no option but to take the long view on the post-Covid economy

Editorial: Boris Johnson and Rishi Sunak face a considerable and overarching problem with public finances and management of the economy

(Brian Adcock)

No one should be surprised at reports of disagreements between Numbers 10 and 11 Downing Street about the public finances. Traditionally it is the prime minister who presses for higher spending and lower taxes, with the obvious political dividend they provide. It falls to the chancellor of the exchequer to say no. Provided both are engaged in a common project and the rights and responsibilities of the chancellor and Treasury are respected (as they were not for Rishi Sunak’s predecessor, Sajid Javid) then such differences in outlook can be managed; good personal chemistry also helps.

So the splits between Boris Johnson and Mr Sunak have to be seen in that context. Mr Johnson is one of life’s optimists, sometimes recklessly so, and one of politics’ expansionists. Mr Sunak is a self-confessed fiscal conservative. In reality, the exigencies of the pandemic have blurred the differences between them, as neither figure had much choice other than to support the economy through the crisis, and to underwrite the Bank of England’s efforts to protect businesses and banks. It worked, on the whole, but it has obviously left a considerable and overarching problem for the public finances and management of the economy.

In fact, there are two questions, and they are interrelated. The first is the obvious one about how and when to repair the public finances, in terms of fiscal policy – the medium- to long-term balance of taxation, borrowing and spending. The second, less often discussed, is how and when the Bank of England is to return to its usual remit of limiting price inflation without undue damage to economic growth.

If the Bank nudges interest rates up even by a little, it will have serious repercussions for the public finances, dwarfing some departmental budgets. If – or when – interest rates do go up in order to stabilise price rises, then that will mean higher mortgage and other loan repayments. That, and the hikes in taxation and cuts in government spending, would have a very depressing effect on confidence, growth and investment. Whatever term the politicians wish to use, it would represent a renewed bout of austerity, and possibly trigger a slump. The unpredictable effects of the post-pandemic bounce-back and of Brexit – such as developing labour shortages – further complicate decision-making.

The only way to deal with such unwelcome trade-offs is to take the long view. The national debt, broadly speaking, amounts to about £2 trillion. In terms of its “affordability”, the debt is equivalent to about 100 per cent of a year’s national income – the highest percentage in about 60 years. On the other hand, the debt remains some way below the level it stood at after the end of the Second World War, a comparable emergency.

In other words, some perspective is required. Britain’s high levels of debt and a fixed-exchange-rate regime cramped economic growth in the postwar era, but life went on and, eventually, the debt was tackled and pushed down to about 24 per cent in the early 1990s. Some of that long-term decline was down to inflating the debt away, and some to Thatcherism, but the task was taken on and did not overwhelm the nation.

The truth is that the sheer scale of the debt dwarfs the current arguments over the cost of the pensions triple lock, over tax breaks for pension contributions, and over the development aid budget, post-Covid educational catch-up, and even reforming social care. With the challenges of achieving a net-zero carbon economy by 2050 on top of putting the public finances on the road to a sustainable future, whatever policies that are adopted have to be placed on a horizon far wider than anything attempted in British government before – decades rather than months or years.

Unfortunately, that is also way beyond the political schedule that invariably suggests itself to a government due to face the electorate in three or four years’ time. This is not the moment to force the pace.