Chancellor Rishi Sunak cemented his status as the government’s Santa Claus on Wednesday, lavishing more gifts to help companies and households deal with the coronavirus crisis.
But while Mr Sunak hailed his “plan for jobs”, the bean-counters at the Treasury were totting up the cost to taxpayers.
The chancellor’s decisions in his summer statement, alongside plunging tax revenues, are likely to push the budget deficit up to £361.5bn, according to Financial Times calculations. This figure is more than six times the deficit forecast in March by the Office for Budget Responsibility.
Mr Sunak said his latest intervention was necessary to protect and create jobs at a time of “profound economic challenges”.
The Treasury disclosed that it had allocated £188bn of support measures to the economy since the start of the Covid-19 pandemic. Of this, by far the most expensive single item has been the government’s job retention scheme, with a net cost of £54bn.
But the Treasury also revealed that it has let government departments fully open the spending taps over the past four months as they grapple with the crisis.
Instead of the UK fiscal watchdog’s June estimate of £16bn of additional day-to-day government spending in recent months, Treasury documents showed it has allowed an extra £48.5bn.
Never since cash limits on Whitehall spending were introduced in the wake of the IMF crisis in 1976 have planned totals been breached so comprehensively.
Some of the additional spending items are as big as several government departments. For example, the likely bill for personal protective equipment for frontline staff in the pandemic will be £15bn, said the Treasury, which is slightly more than the 2019-20 cost of all three of the great departments of state — the Home Office, the Foreign Office and the Treasury.
The cost of the test, track and trace system that is meant to keep the virus under control is set to be £10bn, similar to the day-to-day costs of the Department for Transport.
Add in the likely loss of £116bn of tax revenues resulting from a deep recession, a figure calculated in April by the UK fiscal watchdog, and total borrowing is likely to be about £361.5bn in 2020-21.
At just over 18 per cent of gross domestic product, that figure would be the highest level of borrowing since 1944-45. It would be almost twice the peak recorded in the global financial crisis, when borrowing hit 10 per cent of GDP, and now rank the UK higher than any other leading economy apart from the US, based on the IMF’s June forecasts.
Alongside the huge levels of borrowing, economists questioned whether Mr Sunak’s strategy would serve to protect the economy from pain.
To be successful, the chancellor’s plan for jobs will need to encourage people to spend at close to normal levels so that companies are emboldened to bring millions of workers back from furlough rather than consign them to the dole.
Some economists felt Mr Sunak could have been more generous. Martin Beck, economist at Oxford Economics, a consultancy, said the summer statement “underwhelmed” because it was not clear Mr Sunak’s job subsidies and cut in value added tax for the hospitality sector would be sufficient “to convince firms to retain workers”.
Other economists thought Mr Sunak went further than expected, but still worried about the effects of government support schemes beginning to expire later this year.
Allan Monks, economist at JPMorgan, said fiscal policy would soon turn into “a large net drag on GDP over the next nine months”.
The consensus view among economists was that while there will be a strong initial recovery from the 25 per cent plunge in GDP recorded in the two months to April, this will fall far short of being complete. Some households remain cautious about spending, and continued social distancing is expected to maintain pressure on the hospitality and tourism sectors.
One piece of good news for Mr Sunak is that there is no funding crisis while the government has been borrowing record sums.
Even with the extra £30bn of stimulus announced on Wednesday, the government’s borrowing costs have barely moved, and remain negative for gilts with maturities of between two and five years.
Cheap borrowing partly results from the Bank of England’s bond-buying programme that will purchase gilts worth £300bn by the end of the year.
But the BoE bond-buying will not continue forever and Mr Sunak said he wanted to begin to “put [the] public finances back on a sustainable footing” in the autumn Budget.
The chancellor will hope that the bulk of the deficit reduction will come from the economy beginning to fire on all cylinders again, but he is aware that he is likely to have to supplement this in the future through tax rises or spending cuts.
That will not come easily for Mr Sunak. Since becoming chancellor in February, he has only played Santa Claus, but as Christmas approaches, his new role is likely to be Scrooge.
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