It is widely believed that the substantial deficit incurred to keep the economy running must eventually be repaid. It wasn’t repaid after the financial crisis in 2008 when £500 billion were given to the banks. It doesn’t need repaying either once we get through the coronavirus pandemic to the tune of at least £300 billion. It keeps the economy going and we must learn to love it dearly!
The government injected large sums of money into the economy to reduce substantially the effect of the pandemic on our economy. So far it has been successful but it may well be necessary to do more, particularly if we have a secondary peak in infections with the winter approaching. Current estimates suggest that it is likely to be at least £300 billion.
That money was basically provided by the Bank of England. Many are worried that it will have to be repaid but that is not, in fact, true. The Bank of England don’t particularly need it back because they’re not short of it anyway as they can print more should they need it, which they don’t and never will. The consequence is that the total debt to the Bank of England will increase by about £300 billion to a total of around £800 billion. That is a very large sum of money but you may have noticed that these numbers show a pre-existing debt of about £500 billion. That was the quantitative easing (QE) that was deemed necessary to save the banks from collapse during the financial crisis in 2008.
That £500 billion sum has not been repaid and no one is suggesting it needs to be repaid by the banks who received it. Not repaying this sum has not caused the sky to fall. Similarly not repaying the latest £300 billion will not cause the sky to fall either. For example should the Bank of England decide that all the loans it gave should be repaid in 50 or 100 years, and the interest rate should be very low indefinitely then no one needs to worry about it. After the Second World War the vast debt incurred was basically left and has since evaporated because of general inflation since then.
That is not to say that the austerity/taxation question is dead. We still need to balance the economy from day-to-day. The likelihood is that taxation will be increased on investment/capital gains income which is currently taxed at about half the rate of hard-earned income, but that is another discussion for the future.
In short, we need to learn that this kind of deficit, caused by emergency funding to keep our economy going, does not require urgent repayment at all. It has been of critical benefit for our economy and has been undoubtedly an important and the right thing to do.
An excellent book that explains this in much more detail is by Stephanie Kelton entitled “The Deficit Myth”. Strongly recommended, and just published.