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Can We Afford all the Borrowing the Government is Taking on?

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The huge level of extra borrowing the Government is taking on to support businesses and individuals during the coronavirus pandemic is nothing to worry about, investment expert Kevin Gardiner says.

Kevin was speaking in the latest Wales Business Review podcast, hosted by former First Minister Carwyn Jones.

Kevin is a global investment strategist with Rothschild Wealth Management, and member of the Cardiff Capital Region’s Economic Growth Partnership.

Answering a question from Carwyn Jones about the level of new government debt, he said:

“There is no evidence any big developed government is struggling to fund its planned borrowing at the moment. I don’t think there ever has been seriously. The idea that there is a finite limit on what governments can do, it’s not that clear cut, it all depends on circumstances.

“At the moment, governments, including our own Westminster government, are planning to borrow a lot more than they previously would have done. The debt ratio will rise maybe to levels we haven’t seen since the Second World War.

“But the cost of borrowing is at an all-time low. If people were worrying about the government’s ability to pay back or service this debt or maybe to raise taxes further down the road, or to allow a growing economy to refund the debt, you wouldn’t be seeing gilt yields at a fraction of 1%.”

Kevin Gardiner said the government would repay the debt through a mixture of economic growth, perhaps some tax increases, and other policy changes.

He added:

“But I don’t think we should give the impression this is a pressing crisis, that we should not do these things for fear of not being able to pay back in the future or afford them. There is no sign that investors are reluctant to lend to governments at the moment.”

Kevin Gardiner said the ability of governments to borrow depended on the confidence of the market that even if the country was not growing at the moment, it will grow enough in the future to provide a big enough tax base to service the debt, and eventually make good.

He added:

“I don’t think the debt is necessarily going to go away or has to go away; having a government with outstanding debt is one of the ways you continually upgrade your infrastructure and keep economies moving. We’ve had a national debt since the Napoleonic war; it’s not necessarily a bad thing, we just have to keep it in perspective.”

Carwyn Jones and Kevin Gardiner were joined by Ashley Rogers, commercial director of North Wales and Mersey Dee Business Council, who agreed that the Government could afford the borrowing, and could not afford not to support businesses.

Ashley, who’s family background is in tourism, said tourist businesses this year were facing a “three winters scenario”.

He said:

“Businesses were just coming out of winter with their reserves at their lowest point, and looking forward to the Easter holiday, when they had to close down, and they may not be able to open again until June or July, so they’re effectively facing three winters in one year.

“For those guys it’s absolutely essential that support such as the furlough scheme is left in place, because that is their real concern, that under social distancing they may not be able to operate profitably. That applies also to manufacturing; so there’s a real concern that support schemes such as furlough, if they’re going to be reduced, should be done so in a staggered way and sector specific.”

The Wales Business Review with Carwyn Jones is available to watch on Business News Wales.