Finding the money tree: have we passed the point of no return for small government?

PB Consulting’s Senior Account Executive Toby Bevan writes…

As the dust settled on a politically charged 2019, commentators wearily sat down to scribble their thoughts on what to expect from the calmer year to come. In comparison to its predecessor, 2020 promised to be a year of relative stability aided by a government spending programme that would provide closure on years of economic stagnation and political decay. Few could have predicted what followed.

Over the last month, coronavirus has infiltrated the very fabric of societies right across the globe. Health systems are strained, food producers are startled, and physical social interaction has been essentially banned as nation states enter a war footing against this invisible unknown. As lockdown becomes the status-quo, governments have been forced to prop up fragile economies with public spending programmes amounting to trillions.

The magical money tree

In the UK, Chancellor Rishi Sunak has committed to deliver close to £400 billion to support the economy – an unprecedented fiscal response for any government in peace time. Economists say on current measures, government borrowing in the coming financial year is set to exceed £175 billion. To provide perspective, this was three times more than the amount forecast in the budget just over a month ago. It is also higher than what Gordon Brown signed off on following 2008 economic crash. The Bank of England, which is already owed £435 billion by the UK Government, is preparing to extend that total by £200 billion.

And we aren’t the only ones. Stateside, the US Federal Reserve’s lending to the US government has exploded by a third in just one year to $5.2trillion – 23% of the superpower’s GDP. European powers are offering similar packages in order to prop up economies which would otherwise disintegrate under the pressure of the pandemic.

The figures are staggering. What is more, with businesses and health and social care services demanding more it would appear we are far from reaching the lofty – but otherwise unknown – fiscal summit. For a UK Government emerging from ten years of ‘austerity’, this is especially out of character. Conservative Party philosophy dictates that governments should live and act within their means. And yet, they now find themselves borrowing vast amounts with little idea of how to make the repayments once normal order is restored. Given a return to austerity is almost certainly out of the question now that it is deemed politically unacceptable, many are beginning to wonder how the UK Government will rebalance the books in the post-pandemic landscape.

Shifting the dial on public spending

In the aftermath of a more traditional economic crash, the answer has always been relatively straightforward for governments; provide fiscal support until people start consuming and working again. However, this game-changing virus means we find ourselves in unchartered territory. In fact, the Government has implemented lockdown measures which will ensure the economy doesn’t recover straightaway. On top of that, politicians will also be considering rearranging current economic practice to ensure we are better equipped to tackle pandemics in the future. In real terms, this reconfiguration will surely equate to an expansion of current governmental practice.

And there is another point. Prior to the virus, public services all over the world were under growing pressure to be run as though they are businesses which need to make money. This was evident within our own NHS, best highlighted by the changes implemented by the Health and Social Care Act in 2012. Coronavirus is reversing this trend. The UK Government have implemented processes which have given them complete control of the health system and funded an employment and business support package not seen in modern history. Over the last three weeks, the Government has expanded quicker than it has done in the previous seventy years combined. Not since the birth of the Welfare State have we seen such a comprehensive support package which covers the breadth of the nation – from public services, to businesses and the self-employed.

What does this mean for the future?

Two possible parallel narratives emerge from the Government’s rapidly redefined new role in society. The first possibility is that markets bounce back in the more traditional sense. If this is the case, there will be no need for drastic change and government will continue to consider monetary value as the guiding light of the economy. The lesson learnt from this period will be that the wider economy will require support from the state in similar periods of crisis. Much like before, this support will be provided through temporary stimulus packages rather than a wholesale changes to the system. This option is most similar to the current status quo and preferred by the political elite given it nominates itself as the path of least resistance. However, it is also reliant on the virus dissipating to the point of extinction in the not too distant future.

If the disruption lasts longer, governments may be forced to change tack. If we take the view that current measures have been put in place to save lives, then the state may have to extend its role to protect the economies vital organs on a more permanent basis. This will include healthcare and the production of food and energy so that basic provisions are not victim to the tempestuous, virus-riddled market. This state-sponsored socialism will sit uncomfortably with the current government but could become necessary if coronavirus extends beyond the current predictions. The irony of a Conservative government steering Britain into a welfare-state utopia is palpable, yet increasingly plausible.

In either eventuality, the role of government is set to expand significantly. Firstly, to accommodate the current difficulties, and then to ensure we are better equipped to deal with any disruption next time around. While in the UK this may only cause small scale changes to healthcare provision, the increase of state-sponsored health systems worldwide is set to be substantial. While it may seem highly out of character for a Conservative government to be at the helm during this period of epic expansion, this may represent a turning point in the role of the state as the dial shifts away from small government and towards more intervention.