Wednesday 7 October 2020 10:22 am

Be brave Mr Sunak... and keep spending

Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge

Since Rishi Sunak stepped into the suddenly vacant 11 Downing Street back in February, he’s proved a fleet-footed chancellor, earning praise for the speed at which he launched the furlough programme, provided cash support to struggling companies, and stood behind the economy as the pandemic took hold. 

He quickly realised that extraordinary times required extraordinary measures. Now he’s become the new poster boy for the Conservatives, and the clear favourite to replace an increasingly jaded Boris Johnson. 

If there has been any criticism of Sunak, it has come from traditional Tories who mistake Margaret Thatcher’s assertion that the economy should be run like a household as an irrefutable economic truth. They are asking: how is Sunak going to balance his spending against tax revenues? 

They are the wrong people, asking the wrong question.

The right question is how much more can the chancellor do to boost the economy to create jobs and growth. I’m sure Sunak and his advisers are very familiar with the possibilities of sovereign debt (gilts), monetary theory, and quantitative easing — but in the game of Tory politics, it would be a terrible heresy to suggest financing recovery and growth via more debt. The Tory grandees would fume and fulminate at the recklessness of it all (even as they try to hide their wealth offshore out of taxation’s reach).

Sunak’s speech to the virtual Conservative Conference on Monday talked about the “sacred responsibility” to strengthen public finances, about “hard choices” and balancing budgets. These coded messages hinting at spending cuts and tax hikes were directed at the Tory Shires. 

I sincerely hope he wasn’t serious. Nothing will wreck the anaemic UK economy as much as talk about renewed austerity — even if it plays well to economically illiterate Conservative voters.

The pandemic has severely stressed the economy. Much of the service sector (80 per cent of the economy) remains suboptimal in terms of productivity. A final accord on Brexit remains in the balance. The UK stock market, the FTSE, languishes below levels achieved last century, and is now worth less than the market cap of Apple. Unemployment could soar to  seven per cent, according to recent downside scenarios at the Bank of England.

The reality is much of the downside will naturally sort itself. The UK is a global champion at muddling through. Brexit will be sorted — insiders say there is upwards of 60 per cent chance that a deal gets done. The stock market will recover — it is trading so cheap relative to the rest of the world, it looks like a buy. And we will still be resilient, inventive Britain. Take the British scientist who just won a Nobel prize (okay, he won it working in biotech in California for the past 30 years, but you get the drift).

The virus, however, remains a massive threat. The danger is not so much long-term on the fabric of the economy, but the repeated delays in reopening that are damaging confidence, deferring income, increasing debt loads, and tipping more companies into insolvency.  

The economy will likely recover 90–95 per cent of its former strength fairly quickly. It’s that last five per cent that will prove sticky — and for every new negative pandemic story that stickiness increases. 

This week, it was cinema chains shuttering because of the lack of big films to pull in audiences. The brutal reality is that cutting pandemic rescue spending will deepen recession. It’s clear that whole sectors of the economy — particularly high street retail, aerospace and hospitality — remain excessively vulnerable.

This is not a conventional time. Conventional will not provide solutions for this ongoing and very real economic crisis. Sunak should be planning not just how to maintain the pandemic-battered economy, but how to improve the outcomes. He’s been very clear that he can’t save every job and every industry, but he does hold the fiscal levers to move the economy forward. 

It’s time for more fiscal measures, not less, and it certainly isn’t time to balance budgets.

We’ve just seen a Conservative government throw the kitchen sink of monetary and fiscal spending into addressing the virus. Now is not the time to stop: history is littered with tales of government and central banks mis-timing rate hikes causing economic mayhem. 

Instead, this is the moment to fiscally reflate our way out of recession, by addressing the physical and social infrastructure issues that have been holding back growth for years, the Gordian Knots of the UK economy that have proved too tangled for successive governments to take on.

The government should be thinking big, not small: how to reform our healthcare system properly and stop the NHS’s incessant cash demands from bankrupting us all; how to refocus on education so future generations actually have the skills they need to succeed; how to face down established interests and move towards a more dynamic, sustainable economy.

So where will the money come from?

Well, despite blowout sovereign bond issuance across western economies, there has been limited negative market reaction. Yields are effectively managed close to zero through quantitative easing. And despite massive QE money creation since 2010, inflation remained stubbornly invisible.

True, that is partly because that new money remained invested in financial assets, and if the government creates money to invest directly into the real economy, it could prove inflationary. But that is preferable to a sharp recession. 

In short, the UK government owns the printing presses and can create as much money as required. It can use that power not only to keep the economy on life support during this pandemic, but to fix the structural issues holding Britain back from reaching its full potential.

Can it be done? Can the government spend its way out a pandemic recession without deeper consequences? Does the magic money tree of Modern Monetary Theory exist? Will targeted government helicopter money to boost consumption work? 

Thus far, it has worked. And we have to hope it keeps working, because closing off recovery spending now really would prove economic suicide — and a massive “sell UK” signal.

Be brave Mr Sunak…

Main image credit: Getty

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