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The Tortoise Take: Be more Biden

Friday 7 May 2021

The US president understands that this is an age to borrow and spend. The UK’s chancellor, Rishi Sunak, should be no less ambitious


Joe Biden ain’t messing about. On the very day of his inauguration in January, the new president announced the American Rescue Plan, a legislative package that will cost $1.9 trillion – about a tenth the size of the entire US economy – and that contains various measures to ease the country through what remains of the pandemic. Just 50 days later, having sped through Congress, it was signed into law by Biden himself, to become the American Rescue Plan Act of 2021.

And he hasn’t stopped there. Within weeks of the Rescue Plan passing, Biden unveiled the American Jobs Plan, an even larger package – $2.3 trillion spent over the next eight years – designed to renovate the country’s infrastructure and create employment opportunities in the process. Then last week came the announcement of the American Families Plan, another $1 trillion for families and their children. 

Both of these new plans still have to wend their way through Congress. But, even at this stage, the president is making a pretty huge statement. Within his first few months in office, he’s trying to spend an extra $5.2 trillion – and the fiscal hit is closer to $6 trillion when you factor in the $800 trillion in tax cuts that are included in the Families Plan.

This pace and scale of spending is unprecedented. For perspective: even accounting for Donald Trump’s $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, total US federal spending for the entirety of last year amounted to $6.5 trillion.

Not only is Biden rewriting the rules of government spending, he’s also rewriting the rules of how to fund it. It’s likely that there will be significant tax hikes to cover the second two packages, in particular. But the main idea, especially for the Rescue Plan, is to borrow – and to borrow unapologetically.

According to the non-partisan Congressional Budget Office, the president’s first plan will this year increase the US national debt from 102 per cent of GDP to 108 per cent – an all-time record, surpassing even the 106 per cent achieved at the end of the Second World War. Then they expect the debt to just keep on growing, potentially to over twice the size of the US economy by 2050:

Politicians in the UK shouldn’t just take note of Biden’s radicalism – they should emulate it. But they’re not. The financial crisis of 2008 and the subsequent debt crisis in Greece had a shuddering effect on our politics: both the Conservatives in government and even Labour in opposition have grown scared of borrowing, or at least of borrowing unashamedly. The result is a mixture of groupthink and doublespeak: our political elites keep spending and borrowing incrementally, but bang on about prudence and fiscal discipline. They foreswear “austerity”. But they are not ready to be honest about the need to borrow with purpose and boldness.

Rishi Sunak, the current chancellor, would doubtless protest that he has been a lavish spender in a time of emergency. His most recent Budget boasted that £407 billion has been put forward to support the economy through last year and this year – “the largest peacetime support package for the economy on record”. The same Budget also spoke of £600 billion for “gross public investment” (broadly, infrastructure spending) over the next five years.

But, despite the big numbers, Sunak hasn’t come close to drinking the kool-aid of Bidenonomics. Indeed, the UK’s debt is set to be a magnitude smaller than America’s – at least in the medium term. The Office for Budget Responsibility forecasts that, even with all of the chancellor’s spending and borrowing, the national debt will rise to just under 110 per cent in 2023-24, before declining rapidly in subsequent years.

What is badly needed now is political will and vision. But Sunak is already showing signs of reverting to type, signalling his eagerness to stop spending on credit. In his Budget speech in March, he said that “we cannot allow our debt to keep rising, and, given how high our debt now is, we need to pay close attention to its affordability”.

Yes, these are unsurprising words from a Conservative chancellor whose formative years were shaped by Thatcherite prudence, and who was launched as a politician during the austerity years of the Cameron-Clegg coalition government. But that is precisely the problem. This is not a moment for business as usual but for radical intervention in the UK economy, which – don’t forget – has been worse hit by the pandemic than the US economy. 

Not only will Boris Johnson’s government have to continue the work of repairing the damage from Covid, but it also faces pre-existing challenges (such as improving the country’s consistently low productivity levels) and new ones (transitioning the economy to net-zero emissions). All of this makes the case for Bidenomics in Britain.

So, too, do the debt markets. Interest rates are at historically low levels, pushing down the cost of borrowing. It’s telling that, even with all the borrowing necessitated by the pandemic, the UK’s average annual debt interest for the next five years is forecast to be £7 billion lower than the average for the previous ten years.

Biden is certainly seizing the opportunity afforded by low interest rates and by Democratic control of both the White House and Congress. The price tags attached to his various plans aren’t actually the most striking thing about them – that accolade belongs to the measures within. The Rescue Plan will see cheques worth $1,400 forwarded to millions of Americans. The Jobs plan includes over $100 billion to improve 20,000 miles of American tarmac, a similar amount for building or repairing public schools, and $400 billion to expand care for the elderly and those with disabilities. And the Families Plan would introduce an extensive national programme of paid parental, family, bereavement and sick leave, of a sort never seen in the US before. This is big spending with a purpose.

And the president is being bold in other ways, too. His Rescue Plan passed with support from both Democrats and Republicans in Congress, but the Jobs and Families Plans are a different matter altogether – they’re facing much greater obstruction, in large part because of their fiscal ramifications. Biden’s response? He isn’t giving any ground. “I love the fact that [Republicans] found this whole idea of concern about the federal budget,” he said recently. “When the federal budget is saving people’s lives, they don’t think it’s such a good idea.”

Instead, the president is relying on Democrat lawmakers to back him. In a party-political sense, and contrary to decades of empty chat about “bipartisanship” in Washington, he’s going it alone.

Against that, the British government’s plans for the years ahead seem especially timid. Among the new policies that Sunak trumpeted most loudly at the time of the Budget were freeports (areas where special economic measures apply in order to stimulate business activity) and the “super deduction” (a tax-deductible allowance of 130 per cent for companies investing in qualifying assets). These might be significant policies in normal times. But, after last year, they seem more like tweaks to particular parts of the economy, when what’s needed is a fundamental, unembarrassed overhaul of the entire economy. 

In this case, political timidity is also likely to cause political problems. Sunak’s approach to the public finances is a trap that he’s setting for himself: if he doesn’t spend – and borrow to enable that spending – then he is going to be caught out by every single Marcus Rashford-style plea for government support for people in real need. Given the temper of the times, he will mostly have to go from saying no – to Manchester United forwards, to nurses, to the unemployed – to belatedly saying yes. Or (as he seems to hope) he muster the stubbornness to keep on saying no. It’s an unenviable choice: ditherer or Scrooge?

Of course, there are risks attached to untrammelled spending and borrowing. The world-respected economist Larry Summers, former adviser to Presidents Clinton and Obama, has raised some of them in criticism of Biden’s spending plans. “[T]here is a chance,” he wrote in a recent op-ed for the Washington Post, “that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

And inflationary pressures could lead to pressures of another kind. The Bank of England is currently tasked to keep inflation at a target level of 2 per cent. Were it to go much above that, then raising the main rate of interest would be one of the obvious potential countermeasures. But higher rates would, in turn, increase the cost of government borrowing. 

In any case, just because interest rates have been kept historically low for over a decade doesn’t mean that they will be kept that low forever – or even for the next few years.

And there are other risks, too, including the potential for tax hikes and spending cuts in future, to pay off the munificence of the present. Younger people picking up the tab for the old. 

But the risks of acting ought to be weighed against the risks of not acting – and, at present, the latter are much greater. Without a hefty increase in spending, later generations will have to endure decrepit infrastructure, among other social ills, and everyone will suffer from narrowing economic opportunity in the meantime.

And it ought to be emphasised: the UK could make good use right now of borrowed money. The pandemic has exposed many problems with our public infrastructure, including the lack of excess capacity in the NHS and the total wretchedness of social care. The World Economic Forum’s Global Competitiveness Index, to point at just one barometer, exposes many more. According to the 2019 rankings, the UK – the fifth largest economy in the world – is only 36th for the quality of its road infrastructure. 21st for the reliability of its water supply. 32nd for life expectancy.

We can add to the list. There is a crisis in the provision of mental healthcare. Further education and skills training is still inadequate. The economy remains weighted towards London and its financial services. What about investing in batteries and electrification? Could we not build on existing research centres and turn Britain into the biomedical capital on the world?  

Sunak can take the first step towards tackling these problems by learning from Joe Biden and changing the parameters around government borrowing and debt. Debt-to-GDP ratios of 100 per cent were once unthinkable, and are still certainly unpalatable to Britain’s chancellor, but now we have cause to look beyond them. 

For a start, some perspective is due: Continental countries such as France and Spain are already pushing on to the 120 per cent mark; Italy has surpassed 150 per cent. If the Chancellor really aspires to statesmanship rather than old-school bean-counting, he should have the courage to set an indicative target of, say, 120 per cent – allowing for corrections to the underlying debt, deficit and growth forecasts – with a review after five years.

Remember, Joe Biden used to be pretty hawkish on borrowing. In the 1990s, as the Sanders campaign loved to remind everyone last year, he used to brag about being “a Democrat that voted for the constitutional amendment to balance the budget”. But Biden has changed because the times have, and the times have changed more dramatically in the past year than at any other point in most of our lives. So go for it, Mr Sunak. Give it more than 100 per cent.