It all takes some explaining. The government has borrowed more than £100bn in two months and the national debt ratio is bigger than the economy’s annual output – but investors don’t care a bit.
Orthodox economic theory says rising budget deficits lead to rising interest rates because the financial markets get nervous and demand a higher price for lending to the state. Not these days. There have even been examples of investors paying for the privilege of lending to the British government.
That’s despite the fact that it shows no desire to rein in the deficit any time soon. Lessons have been learned from the coalition government of 2010, which responded to what was then record peacetime borrowing by whacking a still-weak economy with higher taxes and spending cuts. Austerity choked off the recovery and made Britain’s inequality worse.
Low interest rates and the bond-buying scheme known as quantitative easing disproportionately helped those who own assets by driving up the value of their houses and their shares, while spending cuts hit those on the lowest incomes hardest.
A repeat of the austerity experiment is highly unlikely, for a number of reasons. For a start, the experience of the period since the global financial crisis has dented the idea that higher deficits mean higher borrowing costs.
An ageing population is part of the story because older people tend to save more and spend less than younger cohorts. The uncertainties caused by the pandemic has sent this global pile of cash in search of safe havens, and you don’t get much more secure than government bonds in countries that can print their own currency.
As a result, both official interest rates – those set by central banks – and rates set by the actions of the financial markets are going to stay low. The Bank of England has pegged official interest rates at 0.1% and is thinking through the pros and cons of taking them below zero. Real interest rates – those adjusted to take account of the level of inflation – are negative and likely to remain so.
Governments, therefore, have a choice. They can either opt for another bout of self-defeating austerity which they know will antagonise already disgruntled voters, or they can take full advantage of the most benign borrowing environment imaginable to invest in the future. The second option looks more attractive.
As Eric Lonergan and Mark Blyth say in their new book Angrynomics there is already an enormous amount of unhappiness out there. There are many people who feel a rigged system broke in 2008 and has never been satisfactorily mended.
“We think of capitalism as a computer that has just had a massive crash”, the pair write. “However, only a small software patch was installed to get it up and running again when what it really needs is a whole new operating system. Populism – of the left and right – is a recognition of that.”
What’s interesting about Angrynomics is that it comes up with some solutions to the problem it identifies. One is that it makes perfect sense for governments to invest in greening the economy if – as is now the case – the cost of capital is lower than the return on investment.
Another is that rather than seeking to redistribute wealth through the tax system, the government should create a national wealth fund, the proceeds of which would be distributed to those with the fewest assets.
The low level of interest rates gives the UK the opportunity to remedy one of the biggest economic tragedies of the last half century – the failure to put the proceeds of North Sea oil to better use.
When crude was found in the North Sea, the fields were divided up between Norway and the UK. Norway decided it would be a good idea to set up a sovereign wealth fund that could be used to pay for long-term spending, such as the extra health and social costs required for an ageing population. In Britain, the windfall was squandered on current spending: the peak of North Sea oil revenues came in the 1980s as the bills started to roll in for mass unemployment.
Countries with sovereign wealth funds have tended to be those rich in commodities or with economies particularly geared towards exports. Britain’s oil reserves have been dwindling for more than two decades, leaving a sense of what might have been. The current market conditions provide a second opportunity.
Imagine that the government decides to set up a national wealth fund, Lonergan and Blyth say. It can borrow at a zero real interest rate for a 15-year period, so it issues bonds worth 20% of national output (around £400bn) and invests in a diversified basket of global equities.
Assuming a real, inflation-adjusted, rate of return of 4-6% the fund would more than double in size over a 15-year period and leave a healthy surplus once the original borrowing had been paid back.
As far as the authors of Angrynomics are concerned, the existence of negative real interest rates is like discovering North Sea oil all over again. They propose that the surplus be distributed in the form of trust funds to the 80% of households who own the fewest assets.
There are risks, of course. A wealth fund would be seriously impaired were the global economy to be permanently debilitated by Covid-19. With that caveat, though, a national wealth fund would help tackle some of the UK’s social, economic and political ills by giving everybody a sense that they have a stake in growing prosperity. It is one those rare ideas that has its supporters on both the left and right and it is easy to see why.