Sunday, September 20, 2020
For Britain, Covid has been the worst of all worlds
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The Covid-19 crisis has seen the return of the public information broadcast, often accompanied these days by public information tweets. For those of us of a certain age, this brings back many memories, the broadcasts not the tweets. Public information films used to tell us to put seatbelts on in cars – “clunk, click, every trip” – though they were presented by Jimmy Savile. We were also told that “coughs and sneezes spread diseases”, a campaign that might be worth reviving now.

I say this because this is going to be a public information column, on the coronavirus pandemic and its impact. So get ready for some cold, hard facts. There are, I know, a lot of misunderstandings out there, and not just from the deluded anti-vaxxers, and their fellow travellers, who insist that Covid-19 is a myth. Fortunately, they are a tiny and nutty minority.

Let me start with Covid-19 itself. Many people will be aware of the daily figures for UK deaths from coronavirus, measured by people who have died within 28 days of having a first positive Covid-19 test. The cumulative total now stands at a little under 42,000. Even on the basis of this narrowest definition of Covid deaths, Britain has the fifth largest global death toll, after America, Brazil, India and Mexico.

Most people will also be aware, I hope, that this underestimates the true total. The Office for National Statistics’ weekly comparison, of numbers where Covid-19 is mentioned a cause of death on the death certificate, gave a total of 56,840 in the period to September 4. It is “a” cause of death for a reason; most victims – not all – had underlying health conditions. 56,840 is equivalent to a town the size of Macclesfield or Aldershot.

How does the death toll for Covid-19 compare with other causes of death? The answer is that many more people have died from other causes during the period of the pandemic, including dementia and Alzheimer’s disease, cancer, heart disease and strokes. Since late June more people have died each week with influenza and pneumonia – which often takes away the elderly - mentioned as a cause of death than Covid-19.

Overall, between the start of the pandemic – the first deaths - and September 4, 16.9% of deaths were attributed to Covid-19, the rest to other causes.
Before moving on, it is worth also mentioning another important figure, which is for excess deaths; those above the five-year average for this period. There were 57,793 excess deaths in England and Wales until September 4 and scaled up for Scotland and Northern Ireland gives a figure of around 65,000.

Shocking though these figures are, each representing a family tragedy and in many cases a lonely death, I hope it is not too callous to say that the economic consequences of the crisis are, when expressed in hard numbers, even more striking.

At the start of this year, the consensus among independent economists, as sampled by the Treasury in its monthly compilation of independent forecasts, was that the economy would grow by a modest 1.1% this year. It was not looking like a good year, the slowest since the financial crisis, for an economy beset by Brexit and other uncertainties.

Little did we know. Now the consensus among economists is that the economy will contract by a huge 10% this year. “Contract” is too mild a word for that, as is shrink. Plunge would be better. Taking 2019’s gross domestic product as a starting point, and ignoring inflation, the difference between an economy growing by 1.1% and one plunging by 10% is £246bn.

In round numbers, the economy has taken a £250bn hit this year, and that is not the end of the story. There will be a cumulative loss of GDP in future years. Bouncing back is not just a question of getting back to where you were. It is also making up the lost ground with a period of stronger growth than was previously expected and that looks unlikely. Even in five years, the economy will be several percentage points smaller than previously expected.

To the human cost of the crisis in deaths and illness can be added the human cost in unemployment. At the start of the year, the consensus among economist was that the unemployment rate would end the year at 3.9%. It is already higher than that, as the latest figures show, and is now forecast to rise to 8.3%. The difference is equivalent to more than 1.5m additional people becoming unemployed, taking the total to just under 2.9m.

The Office for Budget Responsibility (OBR) in its central scenario sees unemployment rising to 3.5m total this year, which implies that more than 2m people will have become unemployed as a result of the pandemic.

Its numbers for the public finances are even more eyecatching. This year government borrowing – the budget deficit – will be £267bn more than it expected before the pandemic, and £87 billion more next year, 2021-22. By the end of this parliament, government debt will be £600bn higher than it previously predicted. That is more than £9,000 for every man, woman and child in the country.

What do we conclude from these numbers? Many people will look to the example of Sweden, which did not have the same kind of lockdown as the UK, relying on voluntary social distancing, restrictions ion gatherings of more than 50 people, table-only service in bars and restaurants and limits on care home visits (where, as in this country, the coronavirus problem was worse). Sweden will suffer a smaller fall in GDP this year, 7.8% according to the OECD, and Covid-19 deaths there per 100,000 people are lower than in Britain.

Sunday, September 13, 2020
We priced ourselves into jobs last time. Can it happen again?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

We are just coming up to the end of the first two weeks of September and you would have to say that the autumn has not started too well. On Covid-19, it has been a case of one step forward – the overwhelming majority of schools returning – and at least one back; new national restrictions on people gathering, the so-called rule of six, that could be in place for many months.

These lurches do nothing for confidence. One minute the talk is of a return to work, the next is the threat of a national lockdown – something I thought had been ruled out by the preference for local responses – if these restrictions do not work.

One minute the chancellor is musing openly about how he might go about the task of repairing the public finances, the next Downing Street is talking of a “moonshot” of 10m tests a day, which could cost £100bn. The only comfort for the Treasury is that there is about as much change of this non-existent technology delivering as there is of Britain landing a man or woman on the moon next year.

It reminds me, painfully, of how non-existent technology was going to solve the problem of the Irish border, and the state of the Brexit negotiations and the government’s deliberate breaking of international law is another sorry start to the autumn. It seems like a long time since we could have our cake and eat it and the German car manufacturers would appear on the horizon and come to our rescue. They won’t. The head of the BDI, which represents German industry, said that the British government “is losing credibility on a huge scale”. I will write about the Brexit mess, but not just yet.

Instead, amid all this gloom, I wanted to try to offer just a tiny glimpse of optimism. A sharp rise in unemployment later in the autumn and over the winter would compound what the government’s chief medical officer, Professor Chris Whitty, has predicted will be a “difficult” few months for Covid-19.

It is quite hard to be optimistic about unemployment. I have written before that keeping the total below 3m (from 1.34m now) would be an achievement. Gordon Brown, the former chancellor and prime minister, has warned of a “tsunami” of mass unemployment, said that pleas for help are falling on “deaf ears” at 10 and 11 Downing Street, and urged a package of measures

The Office for National Statistics will provide an update on Tuesday, though covering a period under furlough, which has held down recorded unemployment. Rishi Sunak and Boris Johnson have both ruled out an extension of the furlough scheme, though the Johnson premiership has characterised by U-turns.

The House of Commons Treasury committee said on Friday that the chancellor could carefully consider a targeted extension of the furlough scheme. It also warned that his job retention bonus, paying employers £1,000 for every furloughed employee they keep on until the end of January, was not effectively targeted and unlikely to be good value for money.

So where is the glimpse of optimism I promised? It comes in two parts. The first, while it may not be enough when set against the tsunami to come, is that we are seeing some job creation announcements amid the gloom. We know which sectors are suffering, notably city centre hospitality, transport and travel, and so on, and tomorrow’s restrictions will not help.

Sunday, September 06, 2020
Sunak's toxic tax problem as spending hits wartime levels
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

It is easy sometimes to forget what an extraordinary period we are living through. There are many ways to capture it with statistics but let me today provide you with just one. What will public spending be this year as a proportion of the economy? What will the state’s share be?

The answer, according to the government’s fiscal watchdog and forecaster, the Office for Budget Responsibility (OBR), is no less than 54% of gross domestic product. That is on the basis of its central scenario. If things turn out worse than it expects, the spending share could be as high as 58%. Even in its optimistic take it is 50%

Let me put that in perspective. In 1976, the peak spending share when Britain had to turn to the International Monetary Fund for a humiliating bailout was much lower, 46.4%.

It was also lower in 2009-10, when high levels of spending and borrowing prompted the coalition government’s austerity programme. Then the peak level of spending was 46.3% of GDP.

The level of spending we are seeing this year is normally only witnessed during wartime, when the state mobilises the private sector to pursue the war effort. Indeed, to add to the comparison, this year’s 54% would be the highest since 1946, at the start of post-war demobilisation.

There has been a flavour of wartime mobilisation during the Covid-19 crisis in the quickly negotiated (and in some cases very bad) personal protection equipment contracts, schemes to quickly make ventilators and to buy up future vaccine supplies and, most notably, in policies like the job retention scheme. The government paid people’s wages, not in this case to fight the enemy, but to stay at home on furlough.

This Covid-19 version of the war effort has so far resulted in £178bn of additional public spending this year, out of £192bn of fiscal support, the rest in the form of tax measures. That is unlikely to be the final bill, So, when we are looking at the public spending share of the economy, the numerator has gone up a lot.

At the same time, of course, the denominator, GDP, will show a fall this year of a magnitude that we have not seen for a century. The OBR predicts a 12.4% drop in GDP this year, slightly more than the 10% drop which is the average among independent forecasters. Either way, a large contraction in the economy and a big increase in public spending can only mean one thing: a substantial rise in the state’s share of the economy.

It helps explain why the chancellor’s thoughts are turning to tax increases, as revealed by this newspaper last weekend, and in the speaking notes for a meeting with Tory MPs he inadvertently gave us a glimpse of last Wednesday.

I have argued here before that a one-off increase in the spending share and in public borrowing need not result in tax hikes. Yes, the crisis means more borrowing and higher debt, but if the extra borrowing is short-lived, that need not be a problem.

The context for that view was the OBR’s first look at the impact of the coronavirus, back in April. Then it expected that the impact of Covid-19 on the public finances would be sharp but temporary, with the path of public borrowing quickly returning to what it had expected before the crisis.

Things have changed. The OBR, like other forecasters, no longer expects a short, sharp fiscal shock. The hangover for the public finances will last for some years. Even in 2024-25, it thinks the budget deficit will be nearly 5% of GDP, compared with a pre-crisis prediction of just over 2%. The deficit then is expected to be double in cash terms what was previously expected. That is why, in his own words, Rishi Sunak wants to “correct our public finances” and re-establish the Tory reputation for “sound finance”.

Sunday, August 23, 2020
A post-lockdown housing boom. But will it turn to bust?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There are many things you might have expected to happen as lockdown was eased but I suspect that a housing boom was not one of them. At a time when it has been harder than expected to get people out of their homes, it was not obvious that the first thing on the minds of many would be moving to a new one.

That there has been a burst of housing activity and a jump in prices is not in doubt, and I shall come onto some of the evidence in a moment. It is possible, of course, that some of this has been stimulated by the experience of lockdown itself, and the prospect of permanent changes in working arrangements.

Who would not want to work from home in a thatched cottage in St Mary Mead, rather than slogging in on the 7.32 to Waterloo, followed by a sweaty Tube journey? Other cities will have their variations on this.

Some estate agents say this has been an important factor, though they are pretty good at talking their own book, and I doubt that it has been the key influence. Even in the strange world in which we are living, most house moves are local.

So what is driving a market that, according to the Nationwide building society saw prices rise by 1.7% last month, with the Halifax only fractionally behind at 1,6%, pushing prices to record levels and annual rates of house-price inflation higher?

The Royal Institution of Chartered Surveyors (RICS) suggested that the easing of lockdown – the housing market reopened three months ago – lifted buyer enquiries out of their post-referendum torpor. According to the RICS’ residential market survey, a net balance of 75% of surveyors (those reporting a rise rather than those reporting a fall) saw a rise in in new buyer enquiries last month.
Surveyors also had something to sell, with a net balance of 59% recording an increase in instructions to sell. In the past few weeks the market has come back to life with a bang.

The first and most obvious reason for the strength of the market in recent weeks has been the bunching effect from a combination of stalled pre-lockdown purchases and pent-up demand. Some of the activity that would normally have occurred in the period between late March and mid-May has instead happened since.

There has been a second factor, supported by traffic figures from Rightmove, the property portal, and its rivals. When Brits were at home, they did not just watch Netflix, bake bread and grow beards. Many scoured the property websites. To this can be added the fact that the normal housing market summer lull, as people disappear to foreign parts, has not really happened this year.

A third factor is, of course, that the chancellor, Rishi Sunak, could not rely on these natural forces to continue lifting the market, so in his summer economic update last month increased the stamp duty threshold in England to £500,000. Some other parts of the UK have lower thresholds, reflecting lower house prices. He was worried that the housebuilders were reluctant to start work on new sites and wanted to provide the additional boost to consumer spending that stronger housing market activity provides. When people move, they spend, on furniture, furnishings and other things.

There is, it seems, a definite stamp duty effect. Knight Frank, the estate agent, reported that the number of offers accepted in the UK market between July 8 and August 3, after the stamp duty announcement, was 146% above the five-year average for that period. Not all of that was the impact of the stamp duty cut, but much of it was.

Sunday, August 16, 2020
Worried about debt? Not in a world running on MMT
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Today, something slightly different. This is in the nature of an economic version of a request show. I have had many requests to write about what is known as modern monetary theory (MMT) and this is my response. MMT has been around for some time, decades or even centuries according to its advocates, but it is relevant now.

My reluctance to write about it has been partly because its true believers, like some true believers in Brexit, can get very exercised when faced with criticism, even it is constructive. Actually, there is an overlap between supporters of MMT and Brexiteers. If MMT works for anybody, it plainly does not work for countries which have joined the euro because they do not have monetary sovereignty. It would have been of no use to Greece during the eurozone crisis

But I am getting ahead of myself. The reason for writing about MMT now is the recently published book by Stephanie Kelton, professor of economics and public policy at America’s Stony Brook University, and one of MMT’s leading advocates. She advised Bernie Sanders, who ran Joe Biden close for the nomination as Democrat challenger for the US presidency. Her book, the Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, is published in this country by John Murray.

It is proving popular, for good reason. Not only are plenty of people interested in MMT but it is written in a non-technical, accessible, even folksy style. It is being read by non-economists, as all the emails I have received urging me to write about it attest, as well as being on the summer reading lists for many economics’ students. Last time I looked it was Amazon’s bestseller in macroeconomics and within sight of the top 1,000 among all titles.

It is arranged as a series of myth-busting chapters, though I do not know if people who are aware of conventional economics believe many of these myths. The first “myth” is that there the government’s budget is not the same as a household budget, something that I thought had been buried many years ago. The same goes for most of the other myths.

The central idea of MMT is simple. It distinguishes between currency issuers and currency users. The only currency issuer in America is the US Treasury, and the Federal Reserve acting as its agent. Everybody else is a currency user.

As a currency issuer, the government has the ability to print as much money as it needs. The budget deficit itself is not a constraint, and neither is government debt. Some claim, wrongly I think, that MMT has already been adopted, in effect, in response to the Covid-19 crisis.

In the world of MMT the government can print enough money to cover a deficit of any size and in extremis to pay off all the accumulated debt of the past. The only tests of whether a budget deficit is too large or too small are inflation and unemployment. If inflation is low, the budget deficit cannot be too high, and if there is unemployment, the budget deficit must be too low.

Many people will be catching their breath at this point, not least because Kelton claims that this is not just a theory but an explanation of how the world works. But that then requires us to be taken down a rabbit hole of implausibility.

If deficits can be costlessly funded and managed by the simple device of issuing currency, why do governments need to raise taxes? In perhaps the least plausible explanation of the way incentives work, people apparently need to work to meet their tax obligations. If they did not have to pay tax, they would not need to work. I rather think they would, to satisfy their wants. Another reason provided for taxing to redistribute wealth and income, does not wash either. You can redistribute wealth and income within the tax system without raising any net revenues, by taking from the rich and giving it to the poor in tax credits.

Taxation exists in the real world to raise revenue. And borrowing by governments also plainly exists. Her explanation is that this is not to raise money, because governments do not need to, but “to offer people a different kind of government money, one that pays a bit of interest”. Try telling that to American and British governments in the past, which have paid a lot of interest to fund their borrowing and have sometimes struggled to do so.

There is plenty more in the book. Some of it, like the policy of a job guarantee for everybody, is not so much part of MMT but an add-on, though at a time of high unemployment possibly a popular one.

MMT is misnamed because it is not monetary at all but almost entirely fiscal. As Kelton puts it: “MMT requires us to demote monetary policy and elevate fiscal policy as the primary tool for macroeconomic stabilization.”

So what should we think about this? MMT has drawn robust criticism from some of the world’s most eminent economists. Kenneth Rogoff, a former chief economist at the International Monetary Fund, writing last year under the headline Modern Monetary Nonsense, described its central idea as “just nuts”. An exasperated Paul Krugman has described trying to debate with MMT advocates as like playing Calvinball, a game in which players make up the rules as they go along.

Larry Summers, the notable economist and former US treasury secretary, has attacked the “ludicrous claims” by “fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone”.

Sunday, August 09, 2020
V, W or Aargh? It depends on the virus - and on jobs
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

When the economy has been hit by as profound a shock as Covid-19, and the unprecedented lockdown measures adopted to limit its spread, we should take comfort where we can. The Bank of England, which gave us its latest forecast on Thursday in its quarterly monetary policy report, offered a modicum of such comfort.

On the basis of its new forecast, we no longer have to look at the early 1700s, the time of Queen Anne, the War of the Spanish Succession of 1706 and the Great Frost of 1709. If the Bank is right, and the economy shrinks by “only” 9.5% this year, it will merely be the worst since 1921, when it shrank by 9.7%. Anybody who talks about the roaring twenties, as some over-enthusiastic tabloids did not so long ago about the 2020s, has to remember that they did not roar last time in Britain.

The Bank, which in an “illustrative scenario” in May suggested that gross domestic product (GDP) could fall by 14% this year, hence the early 1700s’ comparisons, is not yet putting out the bunting. The UK’s recession this year is predicted to be worse than that of the eurozone, down 8%, and America, down 5.75%.

It also provides a health warning that would grace any cigarette packet or box of pills, noting that the outlook “will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors” and that its “projections assume that the direct impact of Covid-19 on the economy dissipates gradually over the forecast period”.

Those are the key assumptions for the Bank, and for other so-called V-shapers like me. It does not help when people talk about a second wave of Covid-19, because that is usually associated with flu outbreaks, which are more severe in the winter. This coronavirus, currently raging in very hot countries, does not appear to be weather-dependent. Even so, if easing lockdown means a return of the infections and deaths, to the point where lockdowns have to be reimposed (and if there are enough local lockdowns you get many of the effects of a national lockdown) that is bad news for the recovery.

On the assumption of a gradual dissipation of Covid-19, as has happened with previous pandemics, the recovery is both rapid and dramatic. After a huge 21% GDP fall in the second quarter, the Bank predicts an extraordinary 18% in the current third quarter. Both represent record-breaking quarterly changes, by a very large margin.

Similarly, after this year’s 9.5% fall, the economy grows by 9% next year, according to the Bank, and gets back to where it was at the end of 2019, before we knew what was coming, by late 2021. That, as Simon French of Panmure Gordon points out, would represent the most rapid recovery in 50 years.

It would also underline the highly unusual nature of this recession and recovery. We have the deepest recession in nearly a century but the downturn happened in just two months, March and April, as lockdown was imposed. Assuming the June GDP monthly GDP figures this week show a rise (the Bank expects a 9% increase on the month), the economy’s journey out of the low point will be confirmed.

Whether it continues depends, as noted, on the virus and the avoidance of a disruptive Brexit. That deserves a piece on its own but most observers expect a compromise, if limited, trade deal in the autumn. I shall return to that.

It also depends on the labour market, and here the Bank has done some invaluable work. The furlough or job retention scheme has been a huge government intervention but the Treasury and Her Majesty’s Revenue & Customs (HMRC) have little information on how many people are currently covered by it, as opposed to the cumulative 9.6m total of employees who have benefited from it at some stage.

The Resolution Foundation think tank has done some useful digging, and now so has the Bank. It estimates that, on average, 6m people were furloughed at any one time during the April-June quarter, and that numbers peaked at over 7m in May. This quarter, July-September, it thinks that the average number of people furloughed will come down to 2m, dropping further to 1m in October, the scheme’s final month. The Bank’s decision maker panel, the latest results of which were also out on Thursday, revealed that at 18% of employees were furloughed in July, down from 30% in June.

Sunday, August 02, 2020
We have to say farewell to the furlough scheme
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The idea that we have experienced two “once in a lifetime” shocks in little more than a decade is now becoming pretty well established. Both the global financial crisis and the Covid-19 pandemic share one thing in common. Nobody, despite many claims to the contrary, really predicted either.

Some warned about the unsustainability of the global economy, the build-up of debt and the dangerous reliance on risky financial derivatives in the run-up to the financial crisis but these general warnings did not add up to a prediction of the crisis in the way it panned out.

Similarly, from the time of the SARS (SARS-Cov-1) outbreak in 2003-4, plenty of people warned that there would in time be an even deadlier virus, in the sense of more infections and a higher death toll. Bill Gates, the Microsoft founder, did a few years ago. But these general warnings could never have told us about the extent of the economic impact, the lockdowns, and the timing of SARS-Cov-2, or as it is usually known Covid-19. I doubt that at the start of the year anybody had a global pandemic at the top of their list of risks for 2020.

Whether predicted or not, these two momentous shocks have had an enormous impact on the economy. The National Institute of Economic and Social research (Niesr), in its latest quarterly review, published a striking comparison of the UK economy’s pre-financial crisis trend, its pre-Covid trend and what the economic think tank now expects over the next few years.

We had got used to the idea that, in general, the economic cycle was rather like a laundry cycle, and that it all comes out in the wash. What was lost in recessions was made up during recoveries, which were usually strong, particularly in the early stages. The pre-recession trend was regained, with little or no overall loss. Between 1955 and 2005 the real level of UK gross domestic product almost quadrupled.

These two shocks are different. They have been big enough to knock the economy hugely off kilter, and to result in a permanently large loss of GDP. So, according to NIESR, real GDP in 2025 will be around £536bn a quarter. That compares with a projection in February, before the scale of the Covid-19 crisis was known, of around £584bn. It compares with a trend figure for 2025, if neither of these shocks had occurred, of around £743bn.

These are huge impacts. In the absence of these two shocks, the economy in 2025 would be nearly 40% larger than it looks like being. It will be almost 30% - 28% - smaller than it otherwise would have been. These shocks make us all poorer and reduce the size of the economy, and that may not have yet fully sunk in. For simplicity’s sake I have for now left out the Brexit shock, which also reduces the size of the economy relative to what it would have been.

Sunday, July 26, 2020
Austerity's off limits, but Sunak will try to squeeze spending
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There have been many tricky public spending reviews over the years. Some even informally revived the historic star chamber to resolve bitter disputes between Whitehall departments and the Treasury. This year’s review, announced by Rishi Sunak a few days ago, is perhaps the trickiest yet, however.

The chancellor’s task in providing support to an economy hit hard by Covid-19 is not yet over. During the crisis he has been handing out money hand over fist. Never before has the Treasury played Lady Bountiful to the extent it has in recent months. Her Majesty’s Revenue and Customs (HMRC), which is normally good at extracting money from firms and individuals, has proved surprisingly adept at handing it out. In the right circumstances, it seems, even tax officials have a soft spot.

Now, however, Sunak has to begin to pivot to a more traditional Treasury position, that of restraining and in some cases reducing public spending. The taps, he is already arguing, cannot be left on forever.

In launching the review, he said there would be “tough choices” and that departments have been asked to identify savings and ways of reprioritising their spending. Though he announced pay rises of up to 3.1% for 900,000 key workers, including doctors, teachers and police officers, he also warned of future pay restraint for the public sector.

This year, with public sector workers not having been furloughed, their pay has risen even as pay for most in the private sector has fallen. Sunak said it was important for the future that there was parity between the public and private sectors.

There are some who would say that the chancellor should carry on regardless with whatever spending the economy and public services need, now and in the future, regardless of a budget deficit which, according to a new EY Item Club forecast, will hit £335bn or 17% of gross domestic product this year, with a risk it could be higher.

This is not just conventional economists who believe that a repeat of post-2010 austerity would be disastrous. I have received many reader requests to write about modern monetary theory (MMT), which I promise to do. One of its most prominent advocates, Stephanie Kelton, has written a book called The Deficit Myth, which provides an indication of where MMT enthusiasts are coming from. More on this soon.

The Treasury does not quite see it like that, and does not regard the deficit as a myth, which will not surprise you. As a bit of background, there is a lot of unfinished business in this year’s spending review.

It was supposed to happen last year but was postponed because of uncertainty over Brexit. Some would say it is brave to hold it his year amid the uncertainty over Covid-19 and Brexit but that is what the government has decided to do.
It will cover everyday spending, current spending, from 2021-22, next year, to 2023-24, three years in total, and capital spending, infrastructure, for one further year, to 2024-25. The unfinished business is mainly on current spending, infrastructure having been a prominent feature of the March budget.

On the face of it, there will be no return to austerity. Sunak has promised that departmental spending, boh capital and current, will rise in real terms over the review period. This sounds more generous than it is.

Torsten Bell, chief executive of the Resolution Foundation think tank, points out that the chancellor has “given himself more flexibility to reduce the size of public spending increases over the coming years, rowing back on significant increases announced as recently as March”.

“The planned 2.8% real terms growth a year has now become a far vaguer promise of some growth in real terms. This could mean very tough times for some public services in the years ahead,” he added.