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14 Briefing Covid-19 and public finances The Economist April 25th 2020
Undercut burdens diminish must tread one of three
broadly defined paths. First, they can pay
back the borrowing using taxation. Sec-
ond, they can decide not to pay, or agree
with creditors to pay less than they owe.
Third, they can wait it out, rolling over
their debts while hoping that they shrink
relative to the economy over time.
The likely constraint on paying off debt
The pandemic will leave the world deep in debt, and force some hard choices
with future tax revenues is politics. Such a
n “how to pay for the war”, a pamphlet the way in which they are paid off could strategy requires some mix of raising tax-
Ipublished in 1940, John Maynard Keynes have a long-lasting effect on their econo- es—which upsets quite a few people—and
looked back on the way that the British gov- mies, and significantly affect the distribu- cutting spending on other things—which
ernment had, in the late 1910s, tried to pay tion of wealth. There are deep differences also upsets quite a few people, including
off enormous quantities of debt with a between today’s circumstances and those some who will not have liked the tax in-
combination of higher taxes and inflation. which Keynes surveyed, perhaps foremost creases either. Nevertheless, after the glo-
Wages had not kept up with inflation, among which is that advanced economies bal financial crisis of 2007-09, which in-
meaning “that consumers’ incomes now routinely shoulder a level of debt that creased debt levels by about a third in
pass[ed] into the hands of the capitalist Keynes would have seen as an unmanage- advanced economies, many countries
class”. Meanwhile the rich, as bondholders, able burden (see chart 1 on next page). But chose to reduce public spending as a share
had benefited from interest on the loans. those dealing with the aftermath of this of the economy. Between 2010 and 2019
This time, Keynes argued, it would be year’s remarkable borrowing should still America and the euro zone cut their public-
better to take money from the workers di- heed his example in looking for the right spending-to-gdp ratios by about 3.5 per-
rectly by forcing them to lend to the gov- way to distribute the pain as they do so. centage points. Britain’s fell by 6 percent-
ernment while the war was on and there age points. Taxation, meanwhile, rose by
was little to spend money on anyway. Later Debt before dishonour between 1and 2 percentage points of gdp.
the government could pay the workers The numbers involved are enormous. Ad- Public appetite for paying off pandemic
back the money they had lent it with inter- vanced economies will run an average def- debts through a return to such austerity
est, using the proceeds of a substantial icit this year of 11% of gdp, according to the seems likely to be scant. The emotional, as
wealth tax. “I have endeavoured”, Keynes imf, even if the second half of the year sees opposed to economic, logic of austerity—
wrote, “to snatch from the exigency of war no more lockdowns and a gradual recovery. people had spent too much, and must rein
positive social improvements.” Rich-world public debt could run to themselves in—does not apply. What is
Like a war, the fight against covid-19 has $66trn, which might be 122% of gdp by more, post-covid publics are likely to want
seen governments, particularly those in year’s end. more spent on their health, not less. More
the rich world, rack up debts so large that Governments wishing to see such debt than half of Britons supported tax in- 1
