The UK along with most of the Western World are, for want of a better word, absolutely screwed…. And that was before Covid-19! Pile on a huge amount of additional debt and then prohibit the entire country from working and you have a catastrophe just waiting to happen. A ticking time bomb!
This debt seems to be the primary way in how the UK plans to get out of this mess. Surely when you find yourself in a hole, stop digging. If we hadn’t seen it with our own eyes, we’d never have believed a Tory government could borrow so much so fast. Boris must have just read Jeremy Corbyn’s latest book “How To Sink A Country Faster Than The Titanic.”
Of course, we’re being facetious, but the terrifying amount of debt and money printing is a serious concern to the UK and your own pocket. Many people will be wondering, if the UK government can just pay everyone’s salary, then why can’t they do this all the time? And why do we normally have to pay taxes? Just print more money and lets all go to Skeg Vegas.
It may sound like we’re criticising the government’s approach but we’re not really; we recognise that there is a real health crisis – Could it have been handled better? Yes. But it could be a lot worse.
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What is the Furlough Scheme?
At the time of writing, more than 4 million workers have been furloughed. That means the government will be paying up to 80% of over 4 million people’s wages up to a maximum of £2,500 per month.
Companies continue to pay these workers’ wages and reclaim it off the government, and this scheme is likely to go on until at least the lockdown ends – whenever that will be. Rumours are that the furlough scheme will be extended and may even run into July, but we wouldn’t be surprised if it continues past this as the UK doesn’t seem to have any exit strategy.
According to Wired, “One in four UK workers, or more than nine million people, are expected to be furloughed during the coronavirus crisis as businesses struggle to survive.”
What Is The Cost?
The last figures we’ve seen suggest the furlough scheme’s costs could reach £42billion but that was before the scheme was extended by a month, and if it keeps going for a few more months and the number of furloughed staff increases we think this could easily reach £100 billion.
That’s not money the government will get back. These are not loans. That money will have disappeared like a fart in the wind.
The real question is what will it cost if the government doesn’t pay everyone’s salary? The effects would be unthinkable. Mass unemployment and severe long-term damage to the economy. In the US they have taken a slightly different approach to bailing out their economy and the unemployed figures are already at 33 million people.
These are insane numbers. To put that into perspective there were only 15.3 million American jobless at the height of the 2008 financial crisis.
So, with that said, the UK’s approach to save jobs should help to get the country back on its feet as soon as it’s safe to do so. If a total lockdown was the right approach – a big if – then we think a furlough scheme to save jobs was the logical follow-on course of action.
Is The Furlough Scheme Too Generous?
Let’s not ignore the elephant in the room. Of course, it’s too generous. Who wouldn’t want to be sitting at home chilling and earning at least 80% of your normal salary, with many people even earning 100%?
Peoples’ living costs have plummeted. You’re not driving, partying, eating out, going on holiday or doing anything else that costs a lot of money, so 80% salary is more than enough! It’s so generous that YouGov found that 88% of people think it would be wrong to start loosening restrictions now. If those people were struggling, we’re betting that that percentage would be a lot lower – people would be begging for the lockdown to end.
Anecdotally, workers are asking to be furloughed, and complaining when they haven’t been. It seems unfair that your neighbours are lying out in the sun and having a beer, when you’re stuck chained to your kitchen table slaving as hard as ever. Who wouldn’t want to be furloughed when those are the terms? Of course, we’re not making light of some people’s situations as there will be plenty of cases of genuine hardship. But many people so far have done very well from this crisis.
Another issue with the furlough scheme is it encourages businesses to just put everything on hold rather than adapt. They can simply just pass the cost of their staff to the state and wait for this to blow over.
If the scheme wasn’t in place or was far less generous, then is it is highly likely that businesses and entrepreneurs would do what they do best – that is, engineer their way out of this mess and somehow prosper.
How Is The Government Paying for it?
There are many other measures being taken and the numbers are eyewatering, but we’re not too fussed about all these loan schemes that the government is offering to businesses, as in theory they should be paid back, so the overall cost of these should be relatively small. That’s a lot of emphasis on the word ‘should’ because who knows what defaults will arise?
Anyway, there are a few ways in which the government is obtaining humungous sums of money to pay for this crisis.
#1 – Borrowing
The first is through borrowing money from the markets and they have been raising billions this way, adding to the ever-growing Debt Mountain. Latest UK debt figures say the total debt is, but factor in other liabilities and some sources say it’s as much as £4.8 trillion – that’s £78,000 for every person in the UK.
Can the government really afford this? Absolutely NOT but they will raise it anyway. Debt is just delaying the inevitable – a big nasty bill for future generations. According to the Independent, some analysts expect government borrowing to top £200bn in the current financial year. This is ridiculous. Who is going to pay for this?
Labour were constantly berating the Conservatives to end austerity after the financial crisis of 2008, but the hard truth is that austerity didn’t even start. If national debt is always increasing it means we’re still living beyond our means. How can it be austerity if you’re still borrowing to cover normal day to day costs?
We as a country have been living beyond our means for far too long and yet nobody is brave enough to put an end to it. As you may have an overdraft with your local bank, the government effectively has one with the Bank of England known as the Ways and Means (W&M) facility.
The borrowing limit on this overdraft is normally quite small at £400m but it has effectively been made unlimited during the Corona crisis. This overdraft is to be used as a reserve but in 2008 the government tapped it up for £20 billion. This overdraft will likely be paid back quickly using additional borrowing.
#2 – Print Money (Quantitative Easing)
We don’t know why it’s called quantitative easing – a more appropriate name would be state sponsored theft.
The Bank of England purchases government bonds from the open market in order to increase money supply. The goal here is to improve conditions in the gilt market, which ultimately allow the government to raise more money through borrowing.
The increased money supply should filter down and stimulate the economy. The problem is that an increased money supply should lead to inflation because the value of money is derived from supply and demand.
If you theoretically doubled the money in circulation, then prices would double. Printing money has a track record of dire consequences as it leads to hyperinflation. Check out Germany after WW1 or Zimbabwe more recently.
The BoE has said it will buy £200bn of gilts in a fresh round of QE. Western Governments generally have inflation targets of around 2% but we think the government’s intention is to engineer higher inflation in an attempt to shrink the debt mountain.
Most people don’t understand inflation properly and while it may be good for eroding government debt, it is not good for your wealth.
By borrowing money, the government is stealing from the future. By printing new money, they are stealing from the value of your savings. Either way, it is you and your children who will be paying for this Furlough scheme.
What are your thoughts on the ever-growing UK national debt? Let us know in the comments section.
4 Comments
Hi Guys
Very well written article. Easy to understand in layman’s terms. The debt problem is global. There is no easy answer and politicians will always kick the can down the road. We have a broken economy in a broken world. Negitive interest rates next
Thanks Dennis. We have an update on the furlough scheme coming out in the next couple weeks on YouTube – stay tuned! Ben
It would be interesting to see which countries have persistently lived ‘beyond their means’ in recent years. My impression is that the overwhelming majority of modern economies choose to do this. This raises some further questions:
What is the end game here?
Will the more sensible countries who are not over-spending gradually amass a huge advantage so that they effectively end up owning the UK and other countries?
Or am I being over-dramatic?
I think you may be right in that long term, countries like the UK and many in Europe and elsewhere who focused on short term-ism and disregarded the long term impact of debt, will end up in decline relative to other countries. Maybe we’ll pull it back! Here’s hoping. Invest in all countries and asset classes to hedge your bets and ride total global growth. Ben
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