The magic money tree—what can possibly go wrong?

[T]he UK government is being kept financially afloat through money printed by the Bank of England. The sums are vast: a deficit of £300 billion this year, made possible by £200 billion of quantitative easing. To put that in perspective, another £5 million will have been borrowed by the time you finish reading this article. In Wednesday’s summer statement, Sunak added another £30 billion, suggesting in the ‘medium term’ the Treasury would figure out how to pay for his jobs and stimulus schemes – but there was no real indication as to when that might be. Right now the pressure is off. The Bank is facilitating a money circle for the government: printing the money it wants to spend, then mopping up the debt it leaves behind. This creates an artificial market, keeping borrowing rates deceptively low. But how long will it last? When might Bailey cut off this supply of cash? How long can we keep getting something for nothing? …

‘We fought the last election saying there was no money tree,’ says one senior Tory MP. ‘Now we say there is one, and it’s in the garden of the Bank of England.’ …

Britain is not alone as it ramps up spending. The world over, central banks are printing money to bankroll governments during the Covid crisis. When this stops, perhaps in the autumn, it will be a test of countries’ credibility. Britain is paying just 0.25 per cent annual interest on money it borrows now, amounting to tens of billions of pounds paid to service the debt. Few economists expect to see a rise in interest anytime soon, but the margin of error is slim; if rates spiked to just 1 per cent, the effect could be crippling.