A Churchillian Solution for the Covid Debt

Government could use tried-and-tested ‘consols’ to manage colossal Covid overspend

• Covid borrowing has led to record peacetime debt totalling £2.2 trillion

• Emergency Covid spending should be separated from normal public finances

• ‘Consols’—effectively bonds with no fixed repayment date—are the best instrument for this task

• Consols give flexibility on when to repay Covid debt and lock in ultra-low interest rates

A new report from the Adam Smith Institute (ASI) calls on the Government to finance debt accrued from Covid-related spending in the same way as Britain has done for past wars.

Pandemics, much like wars, are one of few occasions where massive extra government spending is justified: even among those who ascribe to free market economics. However, it is an inescapable fact that the government has borrowed over half a trillion pounds—equivalent to around £20,000 per household—to tackle the Covid emergency.

Report authors ASI director Dr. Eamonn Butler and Senior Fellow Gabriel Stein make the case for converting Covid expenditure into ‘consols’ (consolidated annuities)—government securities without a fixed repayment date. 

These instruments were first used in Britain in 1751 to pay for the War of Austrian Succession, and were used again to finance the Napoleonic Wars, and by Winston Churchill in 1927 to refinance World War I debt.

The new report, I Owe You: A Churchillian Solution for the Covid Debt, argues that using consols to finance Covid spending would guarantee manageable debt costs and provide future governments with flexibility on when to repay our Covid debts: ideally at a point when the economy is stronger. 

It is vital that governments recognise consols should only be used in exceptional circumstances. The report suggests distinguishing them from normal borrowing by calling them ‘Covid Emergency Bonds’ and pledging to pay them off as soon as economic circumstances permit: for example, when Covid debt has reached a certain proportion of GDP.

Dr. Eamonn Butler, report co-author and Director of the Adam Smith Institute, said:

“We need to clear the one-off Covid debt out of the way so that the government can focus on—and then fix—its long-term overspending problem. Past generations found a good way to park once-in a century borrowing for wars and emergencies. We can do the same.”

Matthew Lesh, Head of Research at the Adam Smith Institute said:

“A once in a century pandemic calls for a once in a century approach to government debt. Covid Emergency Bonds have the power to lock in low interest rates while providing greater flexibility to future governments with respect to repayment dates. They’re really a no-brainer in the face of our mounting public debt.”

Notes to editors:  

For further comments or to arrange an interview, contact Daniel Pryor, daniel@adamsmith.org | 07584778207.

The report ‘I Owe You: A Churchillian Solution for the Covid Debt’ is now live on the Adam Smith Institute website and can be found here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.