In 2010, Liam Byrne left a note to his successor as Chief Secretary to the Treasury which famously read “I’m afraid there is no money”. After all, annual borrowing had just peaked at a record £158 billion, and the stock of debt was about to top £1,000 billion for the first time.
Roll forward a little over a decade and you can now more than double these numbers. The independent Office for Budget Responsibility (OBR) expects the government to borrow around £355 billion this year and debt has already blasted through £2,000 billion – or £2 trillion.
This illustrates the problem facing any Chancellor who argues that there “is no money left” to pay for whatever project is laid before them. But it is obviously an even bigger challenge for the current incumbent.
How can Rishi Sunak really refuse £20 million for free school meals, or even £2 billion for more generous public sector pay rises, when the government can easily borrow many times these amounts at record low interest rates?
To make it worse, the fact that the Bank of England has been able and willing to create £895 billion of central bank reserves to buy £875 billion of gilts (as well as £20 billion of corporate bonds) appears to vindicate those who claim the government can simply print more money, whenever needed.
Those of us who still believe in fiscal discipline and a small state therefore need to challenge this narrative. The role of the Bank of England is a good place to start.
It is simply not true that the government has ordered the central bank to print money to help finance the deficit. Instead, it is the Bank of England’s Monetary Policy Committee (MPC) that has asked the Chancellor for permission to expand “quantitative easing” as a means to support the economy and return inflation to its 2 per cent target.
Of course, the way in which the MPC has implemented this policy has helped to keep the government’s borrowing costs down. But this was not the main aim. If the MPC had thought that there was no need for additional monetary stimulus, or could provide it in other ways (official interest rates had already been cut to near zero), I’m sure it would have chosen differently.
In principle, the government could change the mandate of MPC and order it to print as much money as it wants. But trampling over the Bank’s independence in this way would be devastating for credibility and market confidence. Even if the government could still finance itself at low interest rates, the cost of borrowing for everyone else would soar.
The “easy money” narrative also ignores the exceptional circumstances during the pandemic. It has only been so easy for the government to borrow so much because the Covid recession has meant that private spending has been weak and there have been ample private savings looking for a safe home. This would have kept interest rates low, even without the intermediation of the Bank of England.
What’s more, the government (or its central bank) may be able to create as much money as it likes, but it can’t print the goods and services that the money will buy. The state therefore still faces real constraints on what it can spend. If it overspends, it will crowd out activity in the rest of the economy and drive up inflation.
Finally, even if the government doesn’t face the same budget constraints as a household (either because it can print money or raise taxes at will), there is no guarantee that it will spend the money wisely.
The upshot is that we need a more nuanced line than just “there’s no money left”. A better argument is that the more the government spends, the more resources it will be diverting from the private sector. As every failed socialist experiment has shown, businesses and households usually make better decisions than central planners.
This article was first published on 18th March by Reaction