At times of war and pestilence, the job of the government is to do whatever it takes to steer the country to safety. On these occasions, it is bad form to talk about money.
But now the Prime Minister has declared that we have past the peak of the pandemic, it is time for a debate on how coronavirus will be paid for.
Of course, we no more know the final cost of the virus than we know the final death toll. But we do know that economic activity is falling precipitately. And the sensible interventions of the Bank of England and Treasury can only reduce the pace of that fall. Expenditure is no doubt rising at broadly the same pace as revenue is falling. The nature of the virus means there will be no V shaped recovery. Whole sectors of the economy – restaurants and hotels in particular – will be hit for many months to come. The cost of the crisis will be substantially greater than that triggered by the global financial crisis of 2008-09 crisis but will fall some way short of a World War.
In the short to medium term, this cost can be met by borrowing. London has deep capital markets. The UK has a first rate debt management office and even now it will be considering ways to extend already long debt maturities, the better to lock in record low interest rates. There’s a case for issuing perpetual debt, as Pelham did with consuls in 1751 and George Soros has recently recommended to the European Union.
But even the most enthusiastic Keynesian knows that borrowing has its limits. In the end, current spending needs to be financed by revenue – an orthodoxy which united such divergent chancellors as Gordon Brown and Sajid Javid.
The problem facing the country is that the post-crisis state is likely to be much bigger. That will partly be the legacy of wholesale government lending and guarantees. But it will also reflect demands that the NHS should have more spare capacity and that “something must be done” about care homes many of which have been run on a shoestring for far too long. To make matters more complicated, this is the decade when demographic pressures really begin relentlessly to push up spending.
All governments like putting off difficult decisions on the public finances. And so expect to hear a lot about a new growth strategy, and a massive efficiency drive across the public sector. But the Brown, Cameron, May and Johnson governments have announced new growth strategies pretty much every other year since 2008. Productivity and livings standards have hardly shifted. And while sensible people can differ on the long term economic consequences of Brexit, there is a strong consensus that in the short run erecting trade barriers with your nearest and biggest trading partner is going to constrain growth further.
As for efficiency, critics are right that the public sector should be able to do more with less. And maybe the Johnson government will succeed where others fail. But the public want to see more nurses and carers not fewer. And it is striking that Mr Johnson rejects the “austerity” that greater efficiency entails.
And so the harsh truth is that taxes are going to have to rise. Here again, there are lots of easy options. Tax footloose multinationals. Tax the rich. Tax polluters. Introduce a one-off capital levy. The Treasury will be looking at all of these. They may even implement one or two of them. The problem is they will never raise the requisite funding: capital and rich people are notoriously mobile.
There is a reason why income tax, national insurance and VAT account for some two third of tax revenues. They are easy to collect and they are paid by the majority of the population.
If the government is going to raise more in revenue it will be through measures based on these taxes. And remember George Osborne found it much easier to raise £13 billion by raising the VAT rate from 17.5 to 20 per cent than to raise £100 million by extending VAT to pasties and holiday caravans.
The debate on how to raise revenue should start now. And, as an opening contribution to that debate, let me set out my proposal. A new social insurance or solidarity charge modelled on national insurance and based on ability to pay but unlike NIC it would be paid by old as well as young, and on pension, dividend and rental income as well as earnings. Unlike income tax, there would be no reliefs, and so with the broadest possible base the increase in tax rates could be minimised.
Others can no doubt come up with better proposals. But to those who flinched when the Chancellor set out plans in his March Budget for a tax take higher than under any Tory government since the war, one thing is certain: you ain’t seen nothing yet.
The author was Permanent Secretary to the Treasury from 2005 to 2016 and served under three Chancellors.