Return of the bigger state

You know the nation is experiencing something serious when HM Treasury has to seek an overdraft from the Bank of England.

That last happened in the financial crisis and essentially means the pressure on the Government’s balance sheet is so great it cannot issue the bonds or gilts used to fund public spending quickly enough to pay bills.

This is not surprising. The take-up of Chancellor Rishi Sunak’s furlough job scheme, under which the Government pays 80pc of the salaries of hibernated workers, is so great that it will probably cost £16bn for every month that lockdown remains in place. That’s before the bill of 1.2m successful new universal credit applications is totted up.

Then there is the loss of income from the break on business rates, VAT for smaller enterprises and the fall- off in PAYE and national insurance revenues as furloughs and lay-offs set-in.

Resolving the financial crisis in 2008 was a technical struggle which required the banking system to be refinanced so as to keep credit flowing and to stop economies screeching to an abrupt halt. The present Covid-19 crisis hits hard at the grassroots and then feeds back into the financial system: which is why it is just as well the banks are being required to conserve capital by axing dividends and limiting bonuses.

The fiscal costs of propping up countries around the world has been enormous. The International Monetary Fund has come up with a total of $ 8 trillion. That figure excludes direct monetary injections such as the £200bn of extra quantitative easing from the Bank of England. The IMF also claims there has been ‘significant co-ordination’. I suspect former Chancellor Gordon Brown would dispute that.

Among the least effective responses has been that of the eurozone, in spite of the fact that Italy and Spain have been harder hit by the virus than others. As is customary in Brussels, it was left to the 11th hour on the eve of Good Friday for finance ministers to cobble together a joint initiative.

Compared with the budgetary injections made by the uS, Britain, Japan and Germany (acting alone), €500bn from the eurozone-17 for what is a humanitarian crisis looks distinctly unchristian. Historic dividing lines between the mainly Protestant ethic of Northern Europe against the perceived profligacy of the Catholic southern tier look to have been in play.

The German finance minister olaf Scholz called it a ‘great day’ for European Solidarity. one suspects it is more of great day for Germany and the Netherlands, which have steadfastly resisted the sharing of fiscal costs through the issue of eurozone-wide bonds. They argue that such an exercise would be unfair to their own taxpayers.

Instead, the main instrument chosen is a ‘pandemic’ credit line of €410bn from the European Stability Mechanism (ESM), a relic of the 2010-12 euro crisis.

The needy nations are in effect being asked to take further debt onto already overloaded balance sheets. A further €100bn will come from the triple ‘A’ rated Luxembourg-based European Investment Bank, which finances longer-term projects and has a mixed reputation.

There are no free lunches in any of this. Countries accessing the ESM facility will be limited to spending just 2pc of national output on pandemic related costs. In crude terms that is one-tenth of what the Japanese government is proposing to throw at the health catastrophe.

No one really wants commerce in the Western democracies to become dependent on government handouts. But all the evidence suggests that the coronavirus will make consumers and firms dramatically more cautious. The consequences will be a shock to demand and could lead to deflation (already showing up in China).

In such extraordinary circumstances it falls on governments, whether they like it or not, to take responsibility for bridging the gap.