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Philip Mitchell and Geoff White: How a special bond could fairly fund the nation’s Covid recovery


Philip Mitchell is a member of Lewes Conservative Political Forum. Geoff White is a fellow member and a chartered accountant, working first for KPMG and then moving to industry to become eventually the CEO of a FTSE 250 company.

The flurry of new Bills in the Queen’s Speech handsomely acknowledges the Prime Minister’s election promises: more police, more hospitals, more nurses, more technology, and the general “levelling up” of living standards and opportunities, particularly in the North.

There is even some extra cash for it as a result of The Chancellor’s last Budget, with increases in capital gains and corporation taxes. Freed of austerity, the United Kingdom can chart its free-trading, post-Brexit path with confidence and determination.

But hold on! Aren’t we forgetting something? Surely the elephant in the room in all realistic political discussions has to be this: just how is the Government going to claw back the £300 billion cost of the pandemic? This article offers a simple, real-money solution, but there are plenty who argue that the deficit should either be ignored altogether or handled by a clever trick of international accounting.

First, consider removing the coronavirus debt from the balance sheets of individual countries (including the UK) and putting it onto the balance sheet of an organisation such as the IMF or the World Bank, who become creditors. The current low levels of interest rates should apply and be fixed for as long as possible. This frees up pandemic-affected countries to stimulate their respective economies and return them to pre-virus conditions in terms of internal borrowing.

Of course, the lender would hold the cards, but play them sensitively, not bearing down on the freedom of economic action of the debtor state but merely ensuring that the “loan” genuinely represented Covid expenditure.

How is repayment of this vast debt pile to be arranged? It could be agreed that a repayment holiday of many decades should apply, allowing inflation to diminish the value of the debt. Or the obligation might never be repaid and sit on the IMF’s books in perpetuity. The interest could be rolled up and dealt with at some time in the future when world growth rates are buoyant.

The EU has recently arranged a bailout fund of bonds, loans, and grants through the European Central Bank to which, of course, the UK will not have access. The essential difference is that this is “asset backed”, with contributions from nearly all Member States which are then redistributed to those who have suffered the most Covid hardship. Of course, wealthy countries like Germany, France and the Netherlands carry the heaviest burdens but, unlike the proposed IMF scheme, they remain balance sheet creditors of the ECB.

Whether or not any such scheme materialises, it is pie in the sky to think that we can be part of it. Whoever oversees the selection of beneficiaries will certainly exclude the non-EU wealthy countries in the West, Australasia, and Japan, which will (probably rightly) be left to plan their own economic recoveries. The effects of the pandemic are being felt most cruelly in India and elsewhere and they will claim a prior right to help. If China became a sort of guarantor of the scheme it would certainly direct funds away from its moral opponents.

Moreover, this is in the end is a book keeping exercise where debts may never be repaid and, if written off, may render the creditor financial organisations insolvent, creating international financial instability. The World Bank or the IMF could be allowed to include the world’s natural untapped natural resources on its balance sheet to secure the borrowing.

The ‘piggybank’ alternative

One of the unfortunate consequences of the pandemic in the UK is the unequal effect on personal wealth. Many people have lost their jobs because businesses have collapsed or reduced their workforces; the furlough scheme, a vital lifeline, has kept millions from poverty. Others, falling through every benefit net, have scraped by on savings and family borrowings.

Yet it would be dishonest not to recognise that another large group of citizens have become wealthier over the last year because they have kept their jobs or pensions, spent virtually nothing, and enhanced their savings or investments. The piggybanks of London and the Home Counties are full to bursting. How can the Government painlessly relieve this affluent group of its cash in order to repair the national finances?

The savings institutions themselves are not attractive repositories of money. Banks and building societies offer wretchedly low rates of interest and even NS&I, faced with surging deposit levels, last year spectacularly cut its headline rate from 1.0 to 0.1 per cent to align itself more closely with its commercial competitors – surely a missed opportunity for the Government to collect worthwhile amounts of cash.

Step forward the Ghost of Christmas Past, George Osborne, now apparently lost to politics. Amid the austerity programme which, candidly, allowed the UK to weather the storms of both Brexit and the pandemic without economic collapse, as Chancellor he launched in 2014 – and then extended – an attractive “granny bond” scheme which compensated for the rapid decline of interest rates and the consequent hit on savers.

Under this scheme a one year bond yielded 2.8 per cent interest and a three year bond brought in four per cent. (These rates are much higher than the Govt can currently borrow at. The rate could be lower if they were tax free). So popular was the market-beating scheme that 610,000 pensioners subscribed up to the maximum of £10,000 per person to produce £7.5 billion in a few months.

Political commentators noted that the timing did nothing to harm Tory support in the 2015 general election; but critics made the point that younger taxpayers who were ineligible to subscribe were in effect subsiding pensioners and enhancing their benefits.

If a similar scheme is launched by Rishi Sunak in his next Budget, it must be fairer than the old, and also answer the charge that it makes little economic sense for the Government to offer the public a rate of return which it does not need to pay for its massive borrowings in the money markets – currently about 0.1 per cent. But this misses three essential points:

First, people of all age groups are currently discouraged from saving by poor interest rates and look instead to more speculative investment such as the Stock Exchange, commodities and even extraordinarily risky crypto currency dealing. Is this desirable?

Second, accumulations of personal wealth during the Pandemic will likely be spent on luxuries which do not benefit the British economy – foreign holidays, German cars, Chinese high tech goods, and all those products of indeterminate origins which have made the Amazon market place such a giant of retail commerce.

Third, and most important, a directly-sold Treasury Bond will have a strong take up and allow the population to feel a sense of participation, almost proprietorship, in the national recovery. Despite grumbles about the shortcomings of lockdown there is a strong element of goodwill towards the Government in its vaccination rollout and gratitude to the NHS for bringing us through the worst health crisis of the century. That goodwill needs to be tapped into and converted into hard cash – but not through punitive taxation.

We therefore support the idea of a series of long-dated (perhaps 50-year) debt instruments, available to everyone over 18 up to a limit of £100,000, paying interest at (say) two per cent or such other amount as is market leading in the UK. But this will entail the raising of minimum lending rate, otherwise banks will rightly contest that they cannot raise funds in a level playing field.

The amounts raised should be enormous but painless – and the burden on future generations of paying back the Covid debt correspondingly reduced.





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