Rishi Sunak has won praise for his handling of the economic effects of the coronavirus pandemic © FT Montage/HM Treasury/Simon Walker

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For the past three months, Rishi Sunak has used Britain’s previously healthy public finances to insure the public against bankruptcy and job losses during the coronavirus lockdown.

Now the Covid-19 alert level has fallen and social distancing restrictions are being lifted, the chancellor can focus on the next two stages of fiscal policy in this crisis — first, stimulus to get the economy firing again and, later, consolidation to ensure the public finances are sustainable.

Decisions on both of these are proving more difficult in Number 11 than providing crisis support, which Mr Sunak believes has been a success. “The situation would be far worse if we hadn’t acted in the way we did,” he said last week.

The Treasury has pencilled in early July for a summer statement where some stimulus measures will be announced, but it will fall considerably short of a full Budget, which will come in the autumn.

With ministers asking local authorities to list “shovel-ready” projects and prime minister Boris Johnson promising an apprenticeship for every young person, Mr Sunak’s statement is likely to include immediate funding for capital spending projects and support for those aged under-25 to help the unemployed find new work.

Column chart of £bn showing Rishi Sunak's Covid-19 spending spree

A second form of stimulus favoured inside the Treasury is simply to open up the economy through a further lifting of Covid-19 restrictions. With household finances in what the chancellor called a “relatively healthy position”, he believes there is no shortage of money. Officials are closely watching the daily data from shops and bank accounts indicating how much is being spent as restrictions are lifted.

Many economists now view further strict restrictions as likely to be counterproductive to health and livelihoods. In a new paper, David Miles, professor of economics at Imperial College and a former member of the Bank of England’s Monetary Policy Committee, argues that, on almost any coronavirus scenario, the costs of continuing restrictions outweigh the benefits to such a large degree that “a substantial easing in restrictions is now warranted”.

Precautionary behaviour may persist

But even as the lockdown is progressively lifted, the concern is that people will be reluctant to spend. The BoE worried last week that “a degree of precautionary behaviour by households and businesses is likely to persist”.

In a foreword to a Policy Exchange report on Monday Alistair Darling, chancellor between 2007 and 2010, backed relaxing spending controls on shovel-ready smaller capital projects and another temporary VAT cut “to boost consumer spending”.

With indications of a decent increase in spending this week as non-essential shops have reopened, but with levels still well below last year, officials have also been looking at what one called “the 2008 playbook” of cuts in value added taxes and vehicle scrappage schemes.

Evidence on the effectiveness of a cash-for-clunkers scheme suggests it provides little benefit to the UK economy apart from helping car dealers, while cutting VAT is also seen as expensive and is out of favour in Number 11.

Numerous studies of the 2008-09 temporary VAT cut suggest it raised retail spending by only about 1 per cent at a cost in today’s prices of some £17bn, with much of the additional spending going on imported goods.

Despite this — and facing significant pressure from retailers — the Treasury is nevertheless still looking at the option of a general temporary VAT rate as a confidence-boosting measure. There is also interest in an alternative plan, favoured by the hospitality industry, of imposing a lower rate of VAT on pubs, restaurants and hotels to boost spending in this hard-hit sector.

EU rules allow countries to lower VAT rates in the tourism sector and many nations in the bloc already take advantage of this flexibility.

Line chart of Public sector net debt as a % of GDP showing public debt rises above the size of the UK economy

Any stimulus package — either imminently or in the autumn — will show Mr Sunak once again as the popular giveaway chancellor. The Treasury is well aware this is only possible while the crisis is at its height.

Once more normal economic times return, the government knows it will have to accept the higher public debt caused by the crisis, but will aim to put the share of debt to national income on a downward trajectory so that the cost of servicing it remains stable into the medium term.

Scale of persistent economic damage hard to predict

Economists are largely agreed that decisions about deficit reduction to stabilise debt can wait until the extent of any persistent damage to the economy is better known.

The top forecasters — the Office for Budget Responsibility, the BoE, the IMF and the OECD — estimate the scale of persistent damage in a massive range of between nothing and 5 per cent of GDP, for example.

Jonathan Portes, professor of economics at King’s College London, said: “Given the uncertainty over the extent of permanent economic damage, there is little point in trying to plan fiscal consolidation now because we don’t know the scale nor whether it requires minimal tweaks or a major set of reforms.”

Scott Corfe, research director at the Social Market Foundation, agreed there was no “imminent need” to repair the public finances although he predicted there would need to be tax rises in future not just to stabilise the public finances but also because there was likely to be a desire for higher health and welfare spending in future. “I wouldn’t expect serious [public finances] consolidation until at least two years’ time,” he said.

Politics, however, is sometimes more unforgiving than economics, and like Lord Darling and George Osborne before him, Mr Sunak is being advised that he might have to announce how he intends to sort out the public finances this autumn while the crisis is fresh in public consciousness and the next general election is still four years away.

These considerations suggest a much hotter autumn in prospect for the chancellor. No longer will he be the popular money man, but instead someone having to take tough decisions on tax and public spending that are likely to please very few people.

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