With unprecedented levels of government debt meeting falling levels of personal debt, Roger Williams peers into his crystal ball and tries to decipher what this all may mean for the gun trade.

Many agree Mr Sunak has taken the sensible course, but there will still be bills to settle down the road
(©Flickr: Andrew Parsons / No 10 Downing Street)

It has already happened. This is not a prediction. By the beginning of the ‘end’ of the Pandemic, in the UK we have:

  • Record levels of Government debt taken on to fund support on employment, and extra funding for the NHS, among other measures;
  • Less consumer debt; starved of opportunities to spend, consumers have taken this time to repay debt;
  • Less use of cash and great use of electronic retail transactions, and less bricks-and-mortar based sales.

What does it mean for us? It means a level of government debt that exceeds the annual output of the nation, a measure that was once thought to equate to bankruptcy for the nation in times before compliant central banks.

This is not that unusual, and western, developed economies have had debt well over 100 per cent, such as Italy, which recorded 134.8 per cent in 2019 and the UK in 1946 at the beginning of WW2, when 259 per cent was seen.

Even further back, at the beginning of the 19th century, the UK was in a similar situation after funding its part in the Napoleonic Wars. This heralded the introduction of income tax, so perhaps this recent comment from the head of HSBC is worthy of note: “It is difficult to avoid the conclusion that once again, the taxman cometh.”

Source: https://www.ifs.org.uk/ publications/14857

The scale of Government borrowing required to fund the ‘fight’ against coronavirus (actually the fight against the measures, a self-inflicted wound, taken to control the virus) is staggering. As you can see from the graph above, the Office of Budget Responsibility’s coronavirus reference scenario estimate was a requirement of £68 billion for April 2020.

The actual figure was ahead even of this at £89 billion. It dwarfs any previous monthly requirement. Borrowing of £225 billion by the UK is planned between April and July this year, and already, £62 billion was borrowed in April and £55 billion in May.

Fiscal discipline and balanced budgets are gone now. Prime Minister Johnson’s ‘build, build, build’ when added to Chancellor Sunak’s ‘grant, loan, grant, loan, grant, loan’ will mean UK debt increases, at a time when furloughs and unemployment ensures cuts in household spending and a reduction in the country’s output. The ratio of debt to output for the UK is set to continue to deteriorate.

The good news is that the worldwide level of interest rates means this high level of debt is relatively easier to service. New public expenditure programmes on schools, hospitals and infrastructure can be funded. It has been a paradox that while our debt ratio (debt to GDP) has continued to rise, servicing costs have gone down as interest rates collapsed over the same period. The UK has kept the confidence of the bond markets and been able to sell its debt.

However, utterances that the UK would have been unable to fund itself in March this year by the Governor of the Bank of England had it not been for a timely £200 billion bond-buying programme may make things more difficult in the future. 

The volatility and current low level of world interest rates is well illustrated by the US, which similarly, we in the UK experience:

While the impact of such things as major policy changes, elections and wars can be seen in interest rates (with rates moving inversely to bond prices), international government bond buyers will look at each country’s success in restoring growth, employment and tax revenues when determining what interest rate they want to compensate them for the risk they are taking in lending.

If the UK fares relatively badly in its economic recovery relative to, say, Germany, Japan, France, Italy or the USA, higher UK interest rates will be required.

If this happens, the free spending that is taking place now will result in higher taxes and/or reduced spending later, unless the economic recovery results quickly in much higher growth. While now is a good time to fund employment through spending on rebuilding our infrastructure, timing may be everything.

If we are not to consign our children to a poorer future lumbered by high, debt-fuelled spending, we might need to win the ‘recovery race’ so that servicing the new higher levels of debt continues to benefit from low interest rates and require higher taxes or austerity to repay.

In contrast to the UK Government, the UK consumer has been paying off their debt. The UK’s £221 billion consumer debt pile shrank as consumers repaid almost £7.5 billion in April, the largest fall in consumer credit ever recorded by the Bank of England.

This included £5 billion repayment in April of credit card debt, which followed some £2.4 billion in March. Consumers were unable to spend in the usual fashion in lockdown, and they received furlough payments and grants. A natural consequence was debt repayment. 

Another consequence of the lockdown was much higher online activity. Working from home became increasingly more common, and Zoom, WhatsApp and Microsoft Teams provided software that became familiar to many.

Add to this purchases via smartphone and computer and touchless payment in the supermarkets, and the lockdown massively reduced the usage of cash seemingly in almost lockstep with online purchases. For many, there will be no going back from this, and bricks-and-mortar retailers are suffering.

Although I have only anecdotal evidence to support it, quite a number of small shopkeepers in my town have closed for good, as the £10,000 grant they received from the local council was sufficient incentive to get out of a low-profit business, especially when combined with the ‘ability’ to walk away from a council lease. 

If you add to this mix: more people reliant on state aid; more people out of work; fewer people travelling on trains, buses and aeroplanes, and fewer pubs, restaurants and hotels in business, it is not hard to imagine that many businesses will not fare well in this environment.

However, there is a reported 500 per cent rise in campsite bookings; a 20 per cent increase in caravans, and a 140 per cent increase in the amount spent on bike repairs.

People want to get out. Range shooting—particularly outdoors—rough shooting, stalking and predator control should all be activities that will appeal after months largely spent indoors. So perhaps, as one gunsmith told me: “We always do well in recessions.”

Can this be true again? 


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