The future of government finance

We are certanly living through turbulent times.

The global recession resulting from pandemic lockdowns in 2020-21 prompted dramatic expansions in public borrowing. This was financed, in whole or in large part, by central banks buying the bonds governments were desperately issuing through successive rounds of quantitative easing (QE).

Even as economies now recover to roughly their pre-pandemic levels, governments face substantially higher debt burdens going forward as interest rates remain close to zero.

Meanwhile, in the background, a future battle royale is brewing for ultimate control of the money creation process. This is between central banks developing their own ‘digital currencies’ with centralised databases of payments, and proponents of cryptocurrencies that embody decentralised, distributed ledgers to record every transaction on their networks.

Here are a few observations about recent developments before we address the Bible’s perspectives on government deficits and money:

1) Pandemic lockdowns could not have been attempted without the safety net of QE. Lockdowns as a policy response to a viral outbreak were entirely unprecedented and were not in any government’s policy toolkit prior to 2020.

They were introduced without the justification of public cost:benefit analyses and have proven to be ineffective in many ways and enormously costly to human relational and physical health and prosperity in the long run.

Such a policy, with the enormous increase in public borrowing entailed, could only be attempted with the assurance of central bank bond purchases to keep interest rates down and the government financed.

The £450bn of bond purchases by the Bank of England has essentially covered the UK government’s additional borrowing since March 2020.

2) Consumer inflation is likely to significantly surpass interest rates for the next decade or so. After the current spike in inflation subsides as global supply bottlenecks are resolved, consumer inflation is likely to stay at higher levels than in the past decade as the effects of globalisation are partially reversed and Higher Income Countries are now wedded to making their energy supplies costly and unreliable (‘greenflation’).

However, central banks will be unable or unwilling to raise interest rates sufficiently to counter this inflation since to do so would result in rapidly rising debt interest bills for their governments.

Hence, ‘real’ interest rates are likely to be significantly negative until the increase in government debt burdens has been inflated away.

3) Central Bank Digital Currencies (CBDCs) represent an enormous threat to privacy and monetary integrity. CBDCs are the digital equivalents of cash and would require every citizen having access to an account at the Bank of England (BoE), in the case of the UK.

There could be benefits to those who are currently without access to a bank account, and some transaction costs could fall, but the dangers and risks of CBDCs are great.

All transactions in CBDCs would be open to governments to monitor. In a financial crisis, bank deposits would flow rapidly to the CBDC, worsening the banks’ plight and giving the BoE effective control over their lending decisions.

CBDCs would be programmable, allowing the BoE to introduce negative interest rates, taxes on deposits, incentives to spend on items deemed politically desirable (e.g. electric cars) and taxes on undesirable items (e.g. sugar).

Most worryingly, it could facilitate the creation of money to fund government spending without the balance sheet constraints entailed in QE – a policy propounded by supporters of ‘modern monetary theory’ (MMT).

How should Christians respond to such developments in the light of the Bible’s teaching?

We have various pointers:

1) Limits on the power of central government. On the one hand, the state legitimately acts as God’s instrument for the restraint of evil (Rom.13:1-7; 1Pet.3:13-17). On the other, its powers need to be limited in order to restrain tyranny (Deut.17:14-20; 1Sam.8; Rev.13).

Operating a fiat currency and QE have relaxed the budget constraint on central government and have recently facilitated the use of draconian powers (lockdowns, vaccine mandates etc.). Constraints on such abuses of power need to be restored rather than enhanced as they would be through MMT and CBDCs.

2) The monetary system. There is no prescribed form of money in Scripture although the use of precious metals (usually silver) is referenced and assumed. There is an indication of long-term price stability over centuries encompassed in biblical narratives.

3) An antipathy towards long-term and interest-bearing debt. Due to the Bible’s strong moral requirement to repay borrowings (Ps.37:21), debt is viewed as ‘servitude’ (Pr.22:7).

Within Israel, debts were to be cancelled every seven years (Dt.15:1-6) and should be interest-free (Dt.23:19). As a result, the debts of government or others could not act as long-term stores of value as would be needed for a secure monetary system.

In contrast, nearly all our money currently is the debts of either banks (deposits) or government (cash, central bank reserves).

4) Opposition to the theft of inflation. The way that governments tend to default on their debt is via inflation rather than failing to meet their monetary obligations. Not only does inflation erode the real value of their obligations but it acts as a regressive tax on the poorest, who are least able to protect themselves from rising prices.

5) The desirability of widespread ownership of wealth. The Jubilee (Lev.25) acted to preserve the initial roughly equitable distribution of land within Israel across generations and this ideal is repeated in the Prophets (Mic.4:4, Zech.3:10).

However, the past decade of low interest rates and QE have acted to elevate share and property prices to unprecedented heights relative to wages, thereby raising wealth inequality to extreme levels.

What actions can we take in light of these principles?

1) Argue to restrain government indebtedness. While there may be a case for governments to run deficits in crisis situations, such deficits are now endemic, with the last year of UK government surplus being 2001-02.

Hence, more robust accounting standards need to be applied to government (especially regarding their pension deficits) and a commitment to intergenerational fairness whereby the overall balance sheet of government is set to be made more robust over time.

2) Deleverage the economy and financial system to make them more resilient to shocks. In addition to bringing down government debt, the indebtedness of household and company balance sheets can be made more robust by switching corporate debt for equity and encouraging equity-sharing arrangements rather than mortgages.

Tax breaks to company debt need to be removed, if not reversed. Doing so would help the system cope with a stable price level.

3) Oppose CBDCs. Any benefits from CBDCs are far outweighed by the danger of their facilitation of tyranny over the population, as we are seeing with China’s ‘social credit’ system, which is being combined with their digital renminbi.

Hence, respond to any consultations and parliamentary votes to oppose such moves. If CBDCs proceed, they need to have cast-iron privacy guarantees and be ‘nonprogrammable’.

4) Prepare for structurally higher inflation than in the past decade.

5) Pray for wisdom for elected leaders and central bankers. These are complex issues with far-reaching implications for societies in the future.

Dr. Paul Mills graduated in economics from Cambridge University and worked as a researcher at the Jubilee Centre before returning to the University. Having completed his PhD, he worked as an economist specialising in public finance and financial markets in the UK and Washington DC.

He is the author of several Cambridge Papers on debt, interest and the Bible.

This article was first published on the website of the Jubilee Centre and re-published with permission.