“… a plan conceived in the spirit of social justice, a plan which uses a time of general sacrifice, not as an excuse for postponing desirable reforms, but as an opportunity for moving further than we have moved hitherto towards reducing inequalities.” 
John Maynard Keynes
Eighty years ago, on the outbreak of the Second World War, Keynes wrote a set of articles explaining how the British Government could pay for the war effort without unduly restricting consumption. The articles were subsequently published as a pamphlet entitled How to Pay for the War A Radical Plan for the Chancellor of the Exchequer.
The scale of the coronavirus crisis and its consequences give good reason for recalling Keynes’s pamphlet. In addition to providing medical support and, as in war-time, ensuring essential consumption, social and economic institutions must be maintained, while keeping monetary and financial stability. Writing his articles, Keynes had in mind the mistakes of the British government during the First World War. This time, except for what we may learn from China and Italy, we have no prior experience of a medical emergency on such a scale.
There is another reason for going back to the discussion of war finance during the Second World War. At the time Keynes was writing, Michał Kalecki was working in Oxford and commenting on the same problems of balancing government expenditure and income, with conclusions that are perhaps more relevant in the present crisis. Those commentaries are available today in Kalecki’s Collected Works edited by Jerzy Osiatyński,
The crisis has changed the way in which we conduct our daily business, making any prediction highly speculative. At best an informed observer can try to identify the key factors that will determine the course of the crisis and the recovery from it. While the course of the crisis will be determined by rates of infection, medical needs and the government’s management of the crisis, the course of the recovery will depend on how the material and economic cost of the crisis has been financed. This is further explained in this article. The titles of the sections are taken from Keynes’s pamphlet.
1. The Character of the Problem
Keynes correctly argued that the problem in war-time was to compress consumption, while maintaining decent minumum standards of consumption for the least well off. The problem now is rather different: Consumption is being compressed by emergency measures shutting non-essential retail and other business and cultural activities, reduced opportunities to consume, and the loss of income of many workers, the self-employed and many small and even medium-sized enterprises.
There is an important similarity between the situation in 1939, and the present situation, that has an important bearing on the consequences of the emergency, and how it should be financed. As in 1939, Britain and Poland enter the coronavirus crisis among the countries with the highest income and wealth inequality in Europe. The inequality is associated with high levels of poverty and deprivation, principally because of the deregulation of labour markets, and welfare ‘reforms’ reducing access to support. With the crisis, these inequalities have been made worse: Those with wealth have seen no change in their material condition; the salaried middle class are largely working from home; while non-essential workers are thrown on the mercies of local charity or inefficient state welfare. The concentration of people in poverty in urban areas prolongs the struggle to control the coronavirus because of cramped living conditions and the chronic health conditions (poor diet, diabetes etc.). With meagre and delayed support from the state or their community, and the prospects for begging destroyed by absence of people in public places, the poor will do what they have always done in the face of urgent need. Without the means to satisfy that urgent need, they will borrow. A rise in household debt will therefore hold down consumption in poorer households when the crisis is over. Smaller businesses will be crippled with debt repayments.
In the financial system, the restriction of consumption to food and household necessities has built up deposits of unspent salaries in the banking sector. The counterpart of this, in part, is a rise in business debt. Limited economic activity is concentrating cash flow among suppliers of food and basic necessities, and medical suppliers. Monopolistic practices will further concentrate liquidity in the big businesses that dominate the medical supply and pharmaceutical industries.
After the medical emergency, the removal of restrictions on commercial activities and people’s movements will allow a recovery in consumer demand, as the salaried middle class enter the high street and travel abroad with demand that will be almost heedless of price because it is reinforced by ‘forced saving’ when consumption was restricted. Indebted businesses will be keen to generate the cash flow to repay their debts. Profiteering and inflation will therefore arise after the emergency. To some degree, the rise in prices will be necessary for the solvency of businesses: Even the greatest consumer boom after the crisis will not be able to take up all the consumption that has been deferred during the home confinement; there are only so many restaurant meals that may be eaten in a week, or holidays that may be taken in a year, without a complete change of life-style. In other words, business lost during the crisis cannot wholly be recovered after the crisis: to recover lost income, suppliers will have to raise prices.
Normally, such a consumer boom would bring a recovery in tax revenues, in particular in value added tax receipts and corporation tax. However, if the government cuts its expenditure, in particular withdraws income maintenance payments after the crisis, and attempts to reduce health service expenditure back towards pre-crisis levels, this will slow the rate of economic recovery and the retrieval of tax revenues.
In short, in addition to the epidemic and the social effects of confining people to their homes, there has been a major fall in economic activity and in tax revenues for governments, while governments are being required to maintain huge expenditures on health and replacement income during the crisis and after it. How governments finance this enormous deficit will determine if and how our economies recover after the crisis.
2. The Character of the Solution
Government expenditure is rising massively to pay for medical supplies, hospital staff and construction, and welfare payments, while tax revenues have fallen off with restricted consumption and incomes. After the epidemic, high government expenditure should be maintained, to keep up cash and income flows in the economy. A fixation on reducing fiscal deficits or government debt, just because the medical need has fallen, will hobble the economic recovery and frustrate the intended reduction in debt. The crisis and financial stability in the recovery require government debt to maintain government expenditure and income flows in the economy.
How can all this expenditure be financed? There are essentially four ways in which the expense of the crisis can be met.
The obvious way that will appeal to fiscal conservatives is by raising taxes. This cannot be done on the scale required without reducing real incomes. In view of the sharp increase in income and wealth inequality created by the crisis, it is vital that the tax system be recalibrated to make it more progressive. In particular taxes on wealth and excess profits should be raised to pay for the crisis. Kalecki showed that such taxes would not adversely affect real investment or the strength of the economic recovery. Making taxes more progressive would facilitate and make sustainable continued government expenditure on a high level to prevent recession after the crisis.
A second, more spontaneous (market?) solution the expansion of private debt. This may be augmented by a third measure, the expansion of public borrowing. The fourth way of financing the our way through the crisis is by monetising a large government deficit.
The crisis is already being financed and consumption is being maintained through a huge rise in private debt. With bills to pay and faced with a loss of income and no replacement of that income from the government, households and firms are turning to borrowing formally from banks, or informally from suppliers or landlords with postponed payments or rents. But crisis debt, or ‘forced indebtedness’ has no economic purpose other than survival. It has not been incurred in order buy any asset that will bring a future income. It drains future cash flow, because it is usually short-term, and makes creditors reluctant to lend. Therefore, to maintain their credit standing, borrowers of emergency private debt will try to repay that debt in the recovery. Firms will do so by raising prices and holding down their expenditure, giving rise to slow economic growth and inflation. The greater the debt incurred by private firms and the self-employed for the purposes of maintaining the payment commitments (to workers and suppliers) during the crisis, the greater will be the subsequent debt deflation inhibiting the post-crisis recovery in employment.
The dangers of inflation, combined with falling real wages will slow the economic recovery into the kind of ‘stagflation’ that hit Britain during the 1970s, with disastrous economic, social and political consequences. Avoiding such an outcome means reliance on the government to finance the crisis and the recovery from it. However, the government too has been hit by a drastic fall in its revenues. Financing the emergency means relying on deficit financing on a scale unknown in modern times.
The fiscal deficit can be financed in two ways:
Monetising the large government deficit means getting the central bank to pay the government’s bills by creating bank reserves. Done to excess, the growth in bank deposits will leave business, finance and the middle class floating on a mass of liquidity which will be considered an inflationary threat, and will create financial instability. Fearing this, depositors will convert bank deposits into a more stable foreign currency. The devaluation of the domestic currency in foreign exchanges will raise the costs of imports and accelerate any post-crisis inflation.
Monetisation of the fiscal deficit is only justifiable to relieve liquidity pressures in the bond market and to facilitates the retirement of private debt. If firms are given the cash flow with which to repay their debts, monetisation can alleviate inflationary pressures. However, the condition for this is government expenditure that expands the cash flow of those in business and the self-employed holding ‘forced debt’. As they repay their debts, the monetisation is reversed, cancelling out deposits and loans in bank balance sheets. But this targeted expenditure needs to be done quickly, before inflation takes off. Once inflation starts, firms and households will be more willing to let the real value of their debts be reduced by the rise in prices and incomes, and use their spare liquidity to buy foreign currency.
Central banks have made clear their opposition to monetisation. But in Britain at least the Bank of England is allowing the Government temporary borrowing.
The other way of financing the crisis is through government borrowing. To maintain monetary and financial stability, additional government expenditure should be financed by the issue of long-term debt, to absorb the liquidity that the crisis will concentrate in the bank accounts of the middle classes and large corporations and their banks. To avoid dependence on unstable international financial markets, the bond should have its ownership restricted to residents in the country of issue, and the central bank should be given responsibility for buying and selling the bond in such a way as to keep its money value constant, making it a force for stability in the financial markets that the central bank cannot achieve in the international markets. 
Domestic financing by means of long-term debt not only has the advantage of absorbing the excess liquidity in the banking system. Many people, who confuse government debt with household debt, think that interest and principal repayments on such debt are not transfers outside the economy, or from future generations to the present generation. A domestically-held government bond is simply a commitment for future taxpayers to pay future bondholders in the same economy. If the financing of crisis measures is beyond the tax capacity of the economy during the crisis, the financing of government debt that will spread the cost of the crisis over a succession of years, is certainly within the fiscal capacity of the economy. But it is important that the servicing of the debt be done by taxing the wealthy and taxing profits. If the debt is financed by more general taxation, it will squeeze incomes and expenditure, and slow the economic recovery.
3. Can the Rich Pay for the Crisis?
Yes they can. By definition the rich have spare money. Added to that is the forced saving by the salaried middle class unable to spend their incomes, and the concentration of liquidity in big business corporations. It is this that needs to be drawn upon to pay for coronavirus emergency.
Less obviously, Kalecki showed that, by definition, taxes that they pay towards government expenditure or interest on government bonds, the rich would receive back as profits in the companies that they own or interest on the bonds that they hold. As argued above, a government bond is simply a commitment for future taxpayers to pay future bondholders. If the future taxpayers are the rich who also hold the bonds, then the financing is merely redistributing, rather than reducing their money. With the increase in income and wealth inequality fostered by the crisis it is vital that the burden of paying future bondholders should not fall upon those with the most modest incomes. A shift towards a more progressive tax structure would make sustainable continued high government expenditure with minimal impact on business expenditure and investment.
There is a moral and a political case as well for making the rich pay for the medical emergency. The rich are only modestly inconvenienced in the crisis, largely by the absence of cultural amenities and intercourse, restaurant dinners and international travel, alleviated by their resort to country residences. The poor, in poorer health even before the epidemic, in homes that make it impossible to isolate themselves from family members infected by the virus, have had life-threatening ‘inconveniences’ of loss of incomes and livelihoods, and of being thrown on the mercy of welfare support that cannot cope with pressing needs that do not affect the rich. It is only possible to bring people together to combat the epidemic if the effort demanded is equalised. The commitment has to be made now. Left until after the crisis, consent to such a commitment will depend on the altruism of the rich, and those who sacrifice least will have the least invested in altruism.
In Britain, the Institute for Public Policy Research has calculated that an annual tax of 1% on non-pension wealth in excess of £500,000 would bring in £6.9bn per year, or more than enough to pay the interest on the £200-400bn that has been calculated as the cost of the emergency coronavirus measures taken by the British government. If this is not enough, a further £2.8bn. could be obtained by increasing the rate of corporation tax (the tax on company profits) by 1% from the current level of 19%. It should be remembered that, at the time when Kalecki and Keynes were writing about war finance, an Excess Profits Tax had been instituted, which made the marginal rate of tax on company profits 75%!
The coronavirus crisis affects all of us and has sharply worsened social and economic inequalities. How long the crisis (and those inequalities) last depends on the government’s management of the medical emergency. However, the timing and the character of the economic recovery will depend on how the medical emergency is financed. If the medical emergency and recovery are financed by private debt, the recovery will be slow and inflationary. If the financing is by monetary expansion, then there is a serious risk of adding economic and financial instabilty to inflation. To stabilise and strengthen the recovery, the Government needs to finance the crisis and economic recovery through borrowing, the issue of long-term debt, which should be paid for by a wealth tax reinforced where necessary by an increase in corporation tax. This, along with a programme of strengthening the health, welfare, housing and social services, will provide a financially-sustainable recovery.
If there has been too much reliance on private debt, the usual voices on the right will blame the slow recovery and inflation on the growth of government debt, predict financial catastrophe, and demand reductions in government expenditure and in taxes on the rich. But there is no need to fear any rise in government debt. A rise in debt, through the issue of long-term bonds, serviced by taxes on wealth, is simply a financial operation that brings about the adjustment in the wealth portfolios of the rich necessary to maintain monetary and and financial stability. A rise in long-term debt financed by a tax on profits has more or less the same effect, although the process is less direct. Financing the crisis measures is expected to increase Britain’s government debt from its current level of around 80% of national income to well over 100% of national income. This points to a problem for governments in Europe subject to limits on government borrowing, either by the Maastricht Treaty or by amendments to their constitution, as in Poland. The rise in government debt all over Europe shows the foolishness of such limits, restricting government action in a life-and-death struggle. If we give way to the urge to reduce public debt or abandon progressive taxation, this will only reinforce slow growth and the rising inequalities that we know from the last decade. The society that survives the epidemic and grieves the human losses deserves better.
The author is grateful to Hanna Szymborska and Robert Calvert Jump for assistance with this study.
* * *
 Keynes How to Pay for the War 1940, p. 1.
 This is further explained in Michell and Toporowski ‘Can the Bank of England Do It?’ in https://progressiveeconomyforum.com/publications/can-the-bank-of-england-do-it-the-scope-and-operations-of-the-bank-of-englands-monetary-policy/