Rishi Sunak has added at least £60bn of extra public spending to fight the coronavirus pandemic in just over two weeks — a move that will send the UK’s public finances deeply into the red.
Having in effect delivered three Budgets in just 17 days, the chancellor has committed half as much again to protect business as Gordon Brown’s government did in 2008-09.
An economic slump alongside the fiscal loosening will push government borrowing up to levels last seen at the height of the financial crisis and possibly to levels not seen outside wartime, according to public finance specialists.
The scale of the potential damage to the economy and public finances depends on the depth and length of the recession.
With many economists predicting a decline of more than 10 per cent in the size of the UK economy this year, Isabel Stockton, research economist at the Institute for Fiscal Studies, said the coming deficit figures were likely to be very large.
“A deficit of over £200bn in the coming financial year is well within the bounds of possibility,” she said.
On Friday, the chancellor added another element to the coronavirus job retention scheme, confirming that the government would pay employers the national insurance contributions and statutory pension contributions of furloughed workers in the scheme up to a salary cap of £2,500 a month.
The pledge added another £300 cost to the government for each worker with a salary that qualified for the top payment, meaning the job retention scheme will probably cost closer to £12bn over three months if 3m people are furloughed — more if the measure is extended.
That comes on top of the £9bn for the chancellor’s self-employment package announced on Thursday; £12bn in the original package of support announced in the formal Budget; £20bn on business rate relief and grants in some sectors and a £7bn package to improve social security.
In total, the £60bn of support announced so far will amount to a little under 3 per cent of gross domestic product.
On top of these increases in public spending and tax cuts, the government has offered some £330bn in loan guarantees to companies. But it hopes these will not result in extra expenditure if they keep businesses afloat.
Karen Ward, a former Treasury adviser and now chief market strategist for Emea at JPMorgan Asset Management, said that with the economy likely to contract sharply in 2020 and with borrowing rising towards £200bn, the aim of the fiscal loosening was to minimise the long-term damage from the coming recession.
“Yes, it’s an eye-watering borrowing number, but the ultimate economic and public finance costs would be greater if these measures weren’t in place,” she said.
Treasury officials want to keep people in jobs and companies “ready to go again” when the health crisis is past, according to one aide to the chancellor. But Mr Sunak has acknowledged that he cannot save every business or every job.
With an inevitable hangover to come from the coronavirus crisis, Tim Pitt, partner at Flint Global and a former adviser to Sajid Javid, Mr Sunak’s predecessor in the Treasury, said there would need to be a public finances reckoning after the crisis was past.
“Given spending cuts bore the brunt of deficit reduction after the financial crisis and the absolutely vital role public services are playing in this crisis, substantial tax rises are likely in the medium term,” he said.
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