The government should not worry about its rising debt levels, according to an economic thinktank with close links to the Conservative party that was previously a champion of austerity.
In the latest sign that attitudes to public debt may be shifting, the Institute of Economic Affairs (IEA) on Monday published a paper by two economics professors saying that debt incurred during the coronavirus pandemic “can be coped with” and arguing against trying to reduce it too quickly.
The IEA is generally considered to be one of the UK’s most influential rightwing thinktanks. Boris Johnson has previously been associated with the group, and its analysis directly informed the economic policies of Margaret Thatcher.
“We do not wish to downplay the seriousness of the scale of the debt,” wrote the authors, Forrest Capie and Geoffrey Wood, both professors at City, University of London. “Clearly steps should be taken by government to curb spending and behave extra prudently. Our central point is that large-scale debt is far from unknown in our economic experience. And it would be misguided and futile to jump to tax-raising measures. The debt can be coped with and the best way of doing that is to encourage economic growth.”
They also argued it would be “misguided and futile to jump to tax-raising measures”, instead calling for deregulation and simplifying the tax system. Inflation was a danger if public debt remained high, they said, but it was not inevitable.
The IEA, which does not disclose its financial backers, has traditionally argued in favour of a smaller state, lower taxes and measures to drive down public debt.
Sign up to the daily Business Today email
A 2014 paper by two of its staffers argued that the UK government was facing a “debt timebomb”. The government’s debt stock, at 76.5% of GDP at that time, was “alarming”, the report’s authors wrote. They also flagged a “debt iceberg” ahead and repeatedly said “unsustainable” levels of UK debt required “significant spending reductions and reform”.
However, the Conservative government has spent billions of pounds in its emergency response to the pandemic, causing borrowings to soar. Public sector net debt broke