Oliver Mangan: Now not the time to panic over surge in Covid national debt
Former president of the ECB, Mario Draghi, has argued strongly that public debt should be allowed to increase in the coronavirus crisis.
UK Chancellor Rishi Sunak was stark in the presentation of his public spending review last week, saying the "emergency has only just begun”. It comes as the UK economy is set to contract by 11.3% in 2020, the biggest decline for more than 300 years.
The chancellor’s concerns were, though, focused on the state of the British public finances, amid concerns that unemployment will pick up sharply next year as government supports are withdrawn.
He warned that the public finances were “unsustainable over the medium term” and tough decisions would be required to bring down a large budget deficit. For now, though, he announced further spending increases that will raise the UK budget deficit to almost £400bn (€445bn), or 19% of British GDP.
Finance ministers in other countries, including in Ireland, face similar daunting tasks with the huge deficits.
However, patience is required. Central banks have been sending strong signals that monetary policy will not be tightened for a long time and a similar approach is required on the fiscal front too.
Strong growth would be a big help in reducing budget deficits and the biggest mistake governments could make is to act aggressively too early.
Former ECB president Mario Draghi has argued strongly that public debt should be allowed to increase in this crisis.
The alternative, he warns, threatens a “permanent destruction of capacity and therefore the fiscal base”, which would be much more damaging. And very low-interest rates also mean governments can be patient.
Long-term borrowing can be done at very low-interest rates, allowing governments to extend the maturity profile of sovereign debt out over many decades.
There is also considerable uncertainty about future economic growth.
The anticipated recovery may turn out to be much stronger than expected over the next few years if vaccines prove successful in overcoming the Covid-19 pandemic and that would mean budget deficits fall more quickly.
Governments will be in a much better position in a couple of years’ time to ascertain where the public finances really stand, rather than trying to second guess them at the bottom of the cycle. Dire warnings about the state of the public finances also risk further damaging already brittle economic confidence.
Now is not the time for panic. Central banks are prepared to give a robust recovery every chance of succeeding.
