How Can The Government Reduce Its Fiscal Deficit After Covid-19?

The government has recently responded to the coronavirus pandemic through an unprecedented level of government spending and transfers in order to keep the country from having a mass jobs exodus as a result of the stay at home orders introduced in late may. Although this has worked so far and Rishi Sunak has received considerable praise as a result of looking after individuals instead of protecting big business (something that was very much criticised in the governments response to the 2008 financial crisis) it is now time to start thinking about how he will react to life being lockdown.

As jobs retention schemes come to an end around October the effectivity of the schemes will be considered but regardless of whether they can be classed a success the attention will turn to the growing size of government debt. Government debt was last at this level due to the second world war and was only able to return to modest levels due to aggressive levels of inflation that followed. With the low and stable levels of inflation characteristic of a developed modern day economy this is simply not a viable option.

The only other options are to either grow off the debt or simply pay it off through running primary budget surpluses and cutting spending (austerity). As Britain remains fairly close to the technological frontier productivity growth is moderately low (around 1%) which means if Britain was its economy to grow at a rate that will allow for the debt to gradually reduce its relative size the only option is demographic growth, something which the UK is infamously against (Brexit).

With the last 10 years of austerity in the front of the minds for the electorate it seems the only way to work the debt down will be to start raising taxes on the richest prooportions of the population, something notoriously hard to achieve.