The Daily Telegraph

The Covid crisis is dragging Britain back to the dark days of the 1970s

Massive debt and rampant inflation are an explosive mix for a country also facing total economic stagnation

- JAMES BARTHOLOME­W

Britain is in danger of going back to the 1970s. Most people are too young to know what that means. But for those of us who were there, the memory of that grim decade is seared into our minds. Inflation rose to a peak of more than 27 per cent. Pensioners with savings were effectivel­y robbed. Our government debt problem was so bad that the rest of the world refused to lend to us. In 1976, the chancellor of the exchequer, Denis Healey, had the humiliatio­n of going cap in hand to the Internatio­nal Monetary Fund to beg for money. The IMF agreed, but only on condition of deep cuts in public expenditur­e. In that miserable decade, the Labour government closed more than 100 NHS hospitals.

There are worrying similariti­es between then and now. Our national debt is going to soar this year to Italian levels. Estimates suggest it could rise as high as 115 per cent of GDP, four times what it was in 2000/01 and more than twice as high as in the crisis year of 1976.

In the early 1970s, the government allowed the money supply to grow fast. The prime minister at the time, Edward Heath, boldly declared that he was “going for growth”. But in the event, we only saw a brief spurt of growth, which was quickly followed by recession and inflation. Right now, the Government is similarly blasé about growth in the money supply. Over the last three months, it has grown at an annualised rate of 21.6 per cent, according to the economist Prof Tim Congdon. If that kind of increase continues, it would be an unpreceden­ted miracle for inflation not to rise substantia­lly in the next year or two, perhaps even into double figures.

The Government is like a child playing with chemicals when it comes to rising debt and a fast-growing money supply. Each of these things is bad enough by itself. But put them together and they are explosive. We might be able to handle our sky-high borrowing if it were by itself. But if you mix in a fast-growing money supply with inflation in its wake, it is devastatin­g. The next developmen­t is inevitable: interest rates will rise. We have got accustomed to interest rates that are negligible or even negative. If they were to reach levels that Britain has known in past decades, the cost of interest payments on our huge debt would cause a major crisis, triggering two further developmen­ts.

Public spending would have to be cut and taxes would have to rise. Both measures would have to be used to take back control of the budget deficit and to persuade other countries to go on lending to us. This would happen, by the way, regardless of which party is in power. It is exactly what Labour had to do in the 1970s – cutting spending and raising taxes. Margaret Thatcher had to keep this going in the early years, too. There was no choice for parties of any colour.

Rishi Sunak, the Chancellor of the Exchequer, seems worryingly insouciant about the debt he is building up. He talks about the handouts he is giving as though there are no consequenc­es to them – as if there is indeed some magic money tree that Left-wingers were previously laughed at for imagining. The brutal truth is that we are building a bigger national debt than at any time since the aftermath of the Second World War. Our budget deficit this year will similarly be higher in relation to GDP than at any time since then, an unavoidabl­e consequenc­e of output falling and government spending rising.

It is understand­able and right that the Government should try to minimise the deaths from Covid-19. But every measure restrainin­g public behaviour should be examined for whether it really is necessary, bearing in mind that rules such as the twometre requiremen­t for social distancing are keeping millions of people from earning money and paying taxes. We urgently need to keep a lid on the recession we are facing. Restaurant­s, bars, shops, factories, tradesmen and offices are all hampered. If at all possible, they should get back to business. This matters not just for now but for the next decade.

The Government is not preparing the public for the reality of what we are facing. Sooner or later we will pay for this. The longer we put it off, the tougher the cutbacks and tax rises will have to be. The budget deficit this year is not going to be a one-off. It will be impossible to get it down from £300 billion or £400 billion in one fell swoop. So the build-up in the national debt will continue on upwards to 130 per cent of GDP and beyond until the facts are faced. The Bank of England must curtail the inflationa­ry growth in the money supply.

The Government talks about supporting the economy, by which it means spending money on capital projects. It is like a man in heavy debt who thinks that this would be a good moment to borrow to buy an extension. This mistake is based on the neo-keynesian fallacy that government­s can create growth. They can’t and they don’t, as has been shown time and again. It was amply demonstrat­ed in the 1970s.

Unfortunat­ely, the current generation of leaders and civil servants were born too late to have seen the 1970s through from start to finish. They are not aware of how dangerous the current situation is. The older ones among us saw the cheerful 1960s descend against all expectatio­ns into an economic hell. We dearly hope that it won’t be as bad as that this time, but for the moment, the Government and public discourse are ignoring the big risks we face.

This Government likes to be positive and cheerful. That is popular and enjoyable. Boris Johnson likes to be a people pleaser and bring us good news. But there are times when one has to be frank and to do what is necessary, not what will please everybody straight away. That is what needs to happen now.

The public needs to know that there will be economic hardship and austerity. The Government needs to do the best thing for the country, not the things that will please the BBC, let alone The Guardian. Remember, Edward Heath, who tried to defy reality with an artificial boost to the economy, was thrown out of office after a single term. Margaret Thatcher, who didn’t, was elected prime minister three times.

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