In 2010, as the global economy was beginning to recover from the financial crisis that had taken place just two years before, the UK placed itself in the vanguard of a shift towards austerity. The decade of weak growth and political instability that followed mean that few are keen to repeat the exercise after the coronavirus pandemic. Chancellor Rishi Sunak, who presents the government’s latest spending review on Wednesday, indicated at the weekend that he agrees with his prime minister, Boris Johnson, that there should be no return to the era of spending cuts.
Britain is not alone in this dilemma. To survive the coronavirus pandemic, which has shut down vast tracts of societies and transformed the parts that remain open, the world has taken on more debt than ever before. The Institute of International Finance, a trade group for the finance industry, estimates that during the first nine months of 2020 the world has, in total, increased the amount of borrowing from 320 per cent of global income to 365 per cent, a new record.
For governments in rich countries there is no need to rush towards fiscal retrenchment. The sustainability of national debt depends not on the amount but on its cost. With long-term interest rates at record low levels across the developed world, governments can borrow for decades, cheaply. Britain’s 30-year bonds yield just 0.9 per cent, making the one-off cost of the pandemic easily manageable for the next few decades. There has scarcely been a better time to run such large deficits.
This borrowing has been sensible; debt is a tool precisely for managing such situations. Being able to transfer and delay payments until the world economy is in a better state will make the pandemic more manageable and the economic scars less deep. Failing to take on more debt would mean mass bankruptcies and unemployment. Without effective support, workers would be less able to heed messages to “stay at home”, spreading the virus and causing more economic damage.
Not everyone, however, has the same luxury as advanced economies to borrow cheaply and repay over decades. Many poorer countries have relied on much higher-cost and shorter-maturity debt. The dangers are clear: so far Argentina, Belize, Lebanon, Ecuador, Suriname and Zambia have all failed to repay their debts or had to restructure them during the pandemic.
Much of the debt that poorer countries have used to cope with coronavirus will end up on the balance sheets of the governments of rich countries. The G20 group, which met at the weekend, failed to agree to a new common framework for relieving the debts of poor countries but did continue to offer measures to delay scheduled repayments. Eventually — perhaps after the inauguration of US president-elect Joe Biden — relief efforts will need to go beyond immediate cashflow problems and tackle long-term debt sustainability.
Once the pandemic is finally under control, governments of advanced economies will need to lower their own deficits to a more sustainable level — at least partly because ageing societies will increase the cost of pension and healthcare provision. The discovery of seemingly viable vaccines means they can be confident in being generous now — there will be an end to the pandemic and it is not an open-ended commitment. It is sensible for governments to plan now how they should bring deficits down in the future. But implementing those plans too rapidly would endanger the global recovery — and could worsen the long-term economic damage.