UK Government debt post Corona
Policy options to reduce the debt-to-GDP ratio without austerity
Having spent the last decade consolidating the public finances after the Great Financial Crisis, the British government now finds itself in the position of potentially having to do it all over again as a result of the Corona crisis.
At the beginning of this year the government was confident enough to announce that the decade of austerity was finally over, then the Corona (Covid-19) crisis struck and economic activity collapsed. As elsewhere, the government’s policy response was unprecedented and will have prevented even bigger economic damage.
Once the immediate crisis is over and the economic recovery established though, the government needs to ask itself what it wants to do with the national debt, which will have risen sharply as a result of the economic collapse and the policy response. Who will pay and when? Will it issue, for example, perpetual bonds and make the new debt permanent? Or will the government try to reduce the share of debt in GDP again, say, to pre-Corona levels? And if the latter, over what time horizon? The answers to these questions are as much of a
political as economic nature.
This note presents projections, which illustrate the fiscal challenges ahead. It presents some rough estimates of the fiscal tightening required to bring debt-to-GDP back to pre-Corona levels. It suggests that a fiscal tightening of around 3-4 percent of GDP might be required to achieve this objective over the coming decade. It concludes by showing what this tightening might mean in terms of tax rates…
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