It’s likely to include higher spending on the National Health Service and support for businesses hit by 12 months of lockdowns that have been particularly damaging for retail and hospitality.
Special attention will be paid to how Sunak proposes to finance it. The UK government budget deficit in 2020/21 is about 20 per cent of GDP, the highest figure among the world’s largest economies. There’s speculation that companies that have done well during Covid will be subjected to additional taxes, including on capital gains. An increase in personal taxation may be inescapable.
This is a perverse development. Britain’s Conservative Party has consistently advocated small government and low tax but in government is now planning the opposite.
These are strange times that demand an unprecedented response.
They’ve prompted interest in the prescriptions of champions of modern monetary theory who argue that there’s no need for governments to pay back debts or even worry about how big they are. Conventional economists say interest rates are so low there couldn’t be a better time to borrow.
…it’s a wonder anyone invests in tangible capital at all…
But there’s little attention paid to the role that could be played by the most striking by-product of 12 months of Covid economics: the sharp recovery in share prices since March last year (and the record level they’ve reached in the US despite the country suffering the biggest economic setback since the 1930s).
Prudent corporations will always tend to invest in liquid assets rather than fixed capital. Machinery can break down, buildings can collapse and stocks can be contaminated or stolen. Whatever industry you’re in, it’s nice to know some of your savings are securely digitally recorded and backed up on a high-power fileserver in a bomb-proof location. When returns on financial investments are as stellar as they’ve been, you’ll make more money that way than by actually producing things or creating services. Add to that the irresistible allure that domiciling these assets in a tax haven presents, and it’s a wonder anyone invests in tangible capital at all.
Much is made of the importance of private investment in the productive economy. But the reality is most large corporations do very little and some almost none at all.
On 7 February 2021, the 10 largest companies listed on the London Stock Exchange had assets worth more than £6trn. Impressively, that’s three-times UK GDP. But look closer and the story’s different. Less than a quarter of the total is in a physical form. The rest is various kinds of financial investments plus intellectual property.
If there’s one thing you can’t do with a financial instrument even in a paper form is make anything useful.
An amount totaling almost twice Britain’s national income is being held on the balance sheets of the 10 biggest corporations listed in London in a form that makes money but creates no value. For the FTSE100, it’s easily more than twice that enormous figure.
Put that way, it sounds like a scandal. But it’s actually an opportunity for Rishi Sunak and The Treasury. Diverting around 10 per cent of the intangible capital on the big Ten’s balance sheets into government spending would comfortably finance the UK’s budget deficit this year and next.
How might this be done?
One option is to give tax breaks to companies holding more than 50 per cent of their total assets in a physical form in the UK. This could be machinery, buildings (including homes, for their employees perhaps), transport assets including vehicle parks, a hospital or a school. Or it could be in a new form of government borrowing: long-term infrastructure bonds with a modest but still attractive rate of return.
A more concerted approach would require all firms doing business in the UK to be locally-incorporated and have a balance sheet proportionate to sales with a minimum physical asset/government bond-to-total-assets ratio.
All this looks very radical. But there are few things more radical than ramping up public spending long-term to cope with the Covid challenge with no credible financial plan. And nothing would be more irresponsible than allowing the physical and social infrastructure every society needs to wither due to lack of investment.