With the advent of the crisis that we have been under since March of 2020, the UK government via HM Treasury and the Bank of England have responded with massive fiscal and monetary stimulus. This is essentially to keep people from starving and paying their bills as huge swaths of the economy have been shut down or have had restrictions imposed upon them. There is also the fact that the bankers and the big corporate interest have also benefited from the stimulus, almost like it was another bailout under the guise of a health crisis! We will not look at the question of whether the government reacted in the wrong fashion as we will be focusing on the costs of all the programmes rolled out by the Treasury and the Bank of England. The most important question that we will ask of course is who will pay for all this and how?
So now we will be looking at all the different kinds of spending that has taken place in the last fifteen months or so. We will start with all the government programmes that are supposed to help the general public, their employers and businesses get by because of all the restrictions like lockdown, social distancing etc… One of the major ones is the JRS or Job Retention Scheme – more commonly known as Furlough. This scheme was supposed to end in October of 2020 but has been extended to October of this year and there is also talk that this scheme could be extended again! According to Statista (1). JRS has already cost the government £64 billion as of May 14, 2021. Only time will tell how much more will be spent on this and whether this is a backdoor to some kind of Universal Basic Income scheme or UBI. There are some more programmes to help workers like the Kickstart Scheme and the Trainee and Apprenticeship schemes which will add on to the bill.
We will now look at what the government has done to try and help Small and Medium Enterprises (SME’s) to keep going and it is here that the cost and also the waste and fraud has been massive and will likely end up costing the taxpayer dozens of billions of pounds for generations to come. The stimulus for these SME and some of the bigger corporations is part of the government’s Economic Stimulus Measures (2). The focus here will be the so-called Bounce Back Loan programme that, according to a Financial Times article from December 20, 2020 by Stephen Thomas and Daniel Morris, is a “Giant Bonfire of Taxpayers’ Money”. In this scheme small businesses can borrow up to £50,000 from banks and these loans are government backed so what will happen most likely when the loan is due is that many of the debtors will default on it but the banks will pass the buck to the government or the taxpayer. There has been very little due diligence when giving out the loans as the government saw it as an emergency so according to the FT more than the £43 billion that had been lent out by December of 2020 will be lost, but added on to the national debt that we taxpayers have to fund. The FT article mentioned above points out that one company in Scotland used the scheme for the purchase of a £43k Porsche automobile!
Monetary stimulus is another way in which the government, via the central bank or the Bank of England, has footed this huge fiscal bill that has resulted in the largest fiscal deficit in peacetime of £303 billion or 14.5% of GDP (3). Here the Bank of England has slashed the base interest rates to almost zero (0.10%) in order to keep the credit spigot and housing market going and it has also resumed its policy of money printing or Quantitative Easing (QE). Since lockdowns started last year, the Bank of England has conjured up £450 billion out of thin air in addition to the £4250 billion it had created in response to the 2008 GFC or Great Financial Crisis. These hundred of billions have been used by the bank to indirectly, via the secondary Gilt (UK Government debt) market, buy government bonds in order to keep the government solvent. It is very doubtful that private investors would want to buy a flood of government debt at such low level of interest that the bank is willing to do. The way bonds work is that the higher the price of a bond the lower the yield or interest rate the government has to pay. So QE has helped keep the cost of borrowing for the government very low, and as of June 9, 2021 the yield on the 10-year Gilt is at 0.75%. (4)
So who has benefited the most from the monetary stimulus? We would say it has been the government and also big investors who hold a great deal of government bonds, corporate bonds and equities too. The 1%, the City of London and Wall Street have again been made whole via this monetary largesse and access to almost free money (close to zero interest rates) that us mere mortals can only dream of having. Pensioners and many that have been able to accumulate some savings continue to be short changed as safe investments like Gilts don’t even provide a 1% return! Historically one would have been able to receive on average about 5% interest for a 10-year Gilt. If one is fortunate enough to have saved £1 million, instead of getting a £50k income this person only gets £7.5k now. Likewise someone with £100k would only get £750 instead of £7.5k.
Basically, millions of savers and pensioners are paying the bill of the last year or so.
We would add though that more importantly the general public and generations to come will be footing the bill via the debasement of the currency that we are forced to pay our taxes in. This debasement is the flip side of higher prices of goods and services we are subject to, or what is commonly known as inflation.
If you have read some of our articles we explain how inflation is the increase of money and credit by government and the central bank resulting in the dilution of our currency. As usual it will be us who will foot government spending and central banking money printing – There is no magic money tree!