Just how expensive is the government’s Coronavirus business support package likely to be and how will the national debt be repaid?
After all the Chancellor has said we will need to repay the money spent supporting jobs and businesses.
So does this mean higher taxes for us all when we get back to normal?
There are a number of methods the government could use to ensure this huge increase in national debt be repaid.
This also means there are opportunities to position your investment portfolio the right way. To insulate yourself from lower earnings from businesses and profit from other asset classes.
Can the national debt be repaid?
Firstly, it’s important to be clear what the government is actually spending, what it’s guaranteeing and what it is not receiving in tax revenues.
For example, the government is spending money on paying some of the wages of employees who have been classed as furlough.
They are not spending money right now on loans to businesses via the ‘Coronavirus Business Interruption Loan Scheme (CBILS)’. These loans are provided by commercial banks and the government are guaranteeing them meaning they will step in and repay them if the businesses can’t.
Finally, the government has deferred payment of certain taxes like Business Rates and VAT.
All in all the current ‘package’ has been quoted at £330 billion and the government says it will do more if it has to.
In order to pay for this package the government is borrowing.
The current figure quoted would be around 15% of Gross Domestic Product (GDP – the value of everything we produce). To put this into perspective, during the financial crises of 2007-2009 the government borrowed around 10% of GDP and during the two world wars borrowing was about 20% of GDP.
Of course here we are talking about new borrowing every year. This all adds to the total outstanding debt that the UK owes. This is currently about 85% of GDP but now likely to grow significantly.
Is this a problem?
Well ultimately the more debt we have as a country means the more we may to have to pay in interest payments servicing this debt. This is money that then can’t be spent on things like health or education.
But it’s not all doom and gloom. There are reasons to be optimistic about the future.
After the second world war total debt was about 250% of GDP and we got that down to a manageable level whilst at the same time creating the National Health Service (NHS).
Will national debt be repaid by higher taxes?
We‘re assuming here that the government will want to get borrowing under control and the debt level down. This is not always the case. Remember governments are short term. They may decide to kick the can down the road and leave it for a future government to deal with. Look at the USA for example. They constantly hit their imposed debt limit and then smash past it.
The problem comes though if we have so much debt that interest payments are too high and we can’t afford to service this debt. So let’s assume at some point when the economy is back to ‘normal’ the government will try and tackle the debt.
Direct higher taxes are unlikely as an increase in taxation will likely damage a fragile economy.
The best way to get debt down is to make the economy more productive and therefore government tax revenues are naturally higher. Again this is unlikely in the short term as the economy recovers.
So the other way a government can get debt down is through ‘financial repression’. This is the act of basically keeping interest rates low and inflation higher. If inflation is higher than interest then your debt is reducing in real terms.
So what does this mean for your portfolio?
- Cash is likely to continue to offer very low interest rates and lose money in real terms.
- Inflation could be higher than we have seen for some time so things will be more expensive as demand outstrips supply. This could be good news for stock markets but only up to a point.
- If things become too expensive then people stop spending and the economy could go into recession again.
It’s important you hold a diversified portfolio of assets so that each part performs well in certain market conditions to protect the fall in other parts of your portfolio.
Our own investment strategy has been reviewed and adjusted to take into consideration the increase in debt this government is making.
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Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.