In a novel by C.P. Snow, a physicist turned author who served as science minister under Harold Wilson in the 1960s, the master of a Cambridge college says that “gratitude isn’t an emotion, but the expectation of gratitude is a very lively one.”
The prime minister and her Chancellor may well be having exactly the same thought. After showering the electorate with stupendous amounts of cash, they find their support collapsing in the polls.
Far from being content with the huge subsidies to their energy bills and cuts to both the basic rate of income tax and stamp duty, the voters have responded with outright hostility.
The now-rescinded cut in the top 45p rate of tax was obviously an issue. But it is the increase in interest rates which is far harder to reverse.
Government borrowing has soared since the start of the pandemic. On top of the cost of furlough, we now have the open cheque which the government has written to enable people to consume – more or less – the same amounts of energy as they did before the crisis in Ukraine pushed up prices.
It is hardly surprising that interest rates on government debt have risen. Two years ago, they were close to zero. Now they are around 4 per cent, and much of the increase has taken place in the past couple of months.
Still, the government may feel that the UK has been singled out rather unfairly by the markets. The Germans have announced a much bigger initial package to mitigate the impact of high energy prices, a €200bn “defence shield”. Public debt relative to the size of the economy remains higher in countries such as Italy and Spain.
But it is the perception of government debt which matters rather than the objective facts.
During the various Euro crises in the 2010s, for example, interest rates flared up several times into the 6 to 8 per cent range in all the Mediterranean countries, even though the governments of most of them had done little or nothing to provoke this. Greece and countries like Portugal were perceived as being in the same conditions even though, unlike the well-founded concerns about the Greeks, others were perfectly able to repay their own debt.
All this was anticipated by John Maynard Keynes. In his main piece of work, he championed the idea that extra government spending – which he preferred to tax cuts – could help keep an economy out of recession.
But he qualified this with two key points. When government deficits rise as a result of increased spending, Keynes believed that the method behind how the policy is financed “may have the effect of increasing the rate of interest ”. He went on to suggest that there might be a separate, adverse psychological effect on “confidence”.
Perhaps there is one good thing to come out of all this mess. Keynes clarified the theory: increases in government debt carry the risk of a sharp rise in interest rates and a general slump in confidence.
There have been many such instances in practice. Now, politicians have another real life example right before their eyes.
The doctrine of modern monetary theory, which holds that government spending should not be restrained by fears around the rise in debt, has been exposed for the nonsense that it always was. The fundamental importance of sound finance and restraint is being reasserted. This, at least, is a ray of assurance in the current turmoil.