The success of the UK’s vaccination programme, the Prime Minister’s announcement of a provisional timetable for a return to normal life, and the impending Budget announcement on Wednesday have all turned attention to the question of debt after Covid.

Debt was a chronic issue in our society; the measures taken to combat Covid-19 have made it acute. In his budget on Wednesday, the Chancellor has a tough job, but now is an opportune time to turn around on the path of ever-increasing indebtedness which households, businesses and our government have been following in recent decades.

Channel 4’s recent Dispatches programme on Britain’s Covid bill highlighted that the UK government borrowed £400 billion in 2020, eight times more than in 2019. That borrowing added to the UK’s existing public debt, taking the total well over £2 trillion, more than £30,000 for every man, woman and child in the country. [1]

Businesses’ borrowing from banks increased to £43.2 billion between January and August 2020, up from £8.8 billion in the equivalent period in 2019, with total borrowing expected to be close to £500 billion by the end of 2020.

The impact of the battle against Covid on personal finances has also been dramatic, but whereas the poor have got poorer, the rich have got richer. Although total personal debt has fallen by 10% from a record level of £225 billion in November 2019, while the rich have paid off some of their credit cards, the poor have fallen further into debt.  

Income has fallen sharply for the bottom 10% of households, as jobs have been lost or workers placed on furlough. At least six million people have missed payments on one or more basic household bill. Nearly 9 million people are now ‘severely indebted’, spending more than a quarter of their incomes on debt repayments, and the poorest people are being hardest hit. For this reason, Reset the Debt and the Jubilee Debt Campaign UK’s ‘End the Debt Trap’ campaign is calling for forgiveness of unpayable household debt.

Covid has also created nearly 6 million accidental savers. Those who have kept their jobs and been unable to spend on holidays and eating out have saved thousands of pounds. The divide is so stark that the Institute for Fiscal Studies (IFS) Deaton Review of Inequalities has warned that the fabric of society is under threat.

The Chancellor therefore faces a dilemma. At some point, Britain’s public sector debt mountain needs to be addressed. On the other hand, businesses which had borrowed recklessly before the coronavirus, or which have been forced into debt in order to survive during it, will need time and, we have argued, debt relief in order to re-open successfully, fund investment and create jobs.

As government help to businesses is withdrawn, unemployment could double from 5% to close to 10%. The National Institute for Economic and Social Research estimates that destitution (extreme poverty) could triple or quadruple in some areas of the country, such as the North West.

Income tax revenues depend on people having jobs; VAT receipts depend on people buying goods and services. Raise either too quickly or too much and the Covid recession becomes a depression. Stimulation of spending without measures to alleviate the indebtedness of business risks inflation as supply fails to keep up with demand.

During the last twelve months, the Jubilee Centre’s Task Force on Debt has proposed a number of measures which might help alleviate the economic pressures caused by Covid. We have argued for the need for debt forgiveness as part of business restructuring. We have recommended a temporary universal basic income to protect those whom the crisis has hit hardest. We have suggested that those who have been able to build up their savings should channel them into credit unions to provide a pool of sustainable, community-based loans.

However, these proposals come out of our longstanding conviction that the idea of jubilee articulated in the Old Testament in fact points to an entirely different economic model from the one fuelled by debt and interest which financialised capitalism depends on. We have argued for intergenerational fairness, for structured cycles of debt forgiveness, for a change in the way companies are financed, and for governments to be committed to fiscal prudence. As we emerge from the Covid crisis, governments will need to take measures to put out some of the flames of debt, but now is the opportunity to think fundamentally about turning off the supply of fuel which makes contemporary capitalism so vulnerable to debt crises.

So what should the Chancellor of the Exchequer do on Wednesday? Here are three proposals.

First, a reform to company law, so that companies no longer get a tax subsidy from financing themselves by borrowing rather than through issuing shares and other forms of investment, is long overdue. The Jubilee Centre is just one of many voices which have been calling for it. A parallel move would be to end the tax deductibility of buy-to-let mortgage payments. Allowing buy-to-let landlords to set off their mortgage payments against their tax liabilities fuels a sector whose rise has contributed significantly to shutting out poorer and younger people from the prospect of home ownership.

Second, a windfall tax on those big companies which have extracted excessive profits (what Adam Smith called ‘rents’ ) from their monopoly position or unbalanced contracts. Big Tech companies would be an obvious target.

Finally, a gross wealth tax in which borrowing did not give any benefits. A proposal mentioned in the Dispatches programme was a one-off wealth tax, paid only by the richest households. This would have a number of advantages, not the least of which is that it would help redress the intergenerational unfairness which has seen the Baby Boomers and other older generations horde the nation’s resources. However, the wealth tax as proposed would be a tax on net wealth, after deducting borrowings. In such a form, a wealth tax would not break our culture’s love affair with debt. For the wealthy, debt is leverage, the ability to maximise one’s profit through the ability to borrow cheaply against collateral. A tax on property in which there was no rebate for borrowing would send a signal that debt should be taken seriously, and that we all have got too comfortable with too much of it.

David McIlroy is a barrister and lectures in banking law. He is a member of the Jubilee Centre's post-Covid task force on debt.

Notes

[1]  In addition, the government has roughly £2 trillion of contingent liabilities (mainly unfunded pensions liabilities) and the state pension is an additional £4.8 trillion liability (as of end-2018).