Hopes of a rapid V-shaped recovery are fading and Britain will have to live with the financial consequences of the lockdown immediately and for many years to come. This morning, we report exclusively on a Treasury document which reveals the extent of the damage that civil servants are expecting.
In an unlikely best-case scenario of a quick recovery, the deficit this year would hit £209 billion, up from a pre-pandemic forecast of £55 billion. In the most likely scenario, it would breach £300 billion and in a worst-case one £500 billion.
These are vast figures which would put the UK in its worst fiscal position since the aftermath of the Second World War and send the debt-to-GDP ratio into basketcase territory. Of course, much of the developed world will be in a similar position and the appetite of investors for sovereign debt looks like it will remain healthy. But, as the Treasury document makes clear, something will have to be done to keep the debt ratio in check, with tax rises and cuts of £25-30 billion suggested for the middle scenario.
The report suggests that the Government may need to break its promise of not raising the headline taxes of income tax, National Insurance and VAT. Alongside corporation tax, they are the main revenue raisers. Novel taxes, such as a carbon tax or NHS and social care charge are also suggested. Scrapping the pensions triple-lock, which could save £8 billion a year, is also put forward, as is a renewed public sector pay freeze.
– Unenviable choices –
The Government has, so far, focused on the potentially enormous health costs of the UK’s epidemic, but it will soon have to start talking about the fiscal costs. The Treasury document suggests a summer budget may be needed to set the recovery agenda.
To present this as a “health versus wealth” debate is a false premise. The economy cannot operate properly with a collapsing healthcare system, while the health costs of unemployment, soaring poverty and lost funding for the NHS are enormous.
Ministers are acutely aware of the vast costs on both sides, but finding the right balance will be extraordinarily difficult. Then add to that the complexity of balancing government support for the locked-down economy with preserving the public finances.
That balancing act was clear in yesterday’s furlough announcement. The Chancellor declared that the scheme would continue for another four months, although employers would have to start contributing from August.
Yet, as Gordon Rayner explains, that was something of a defeat for Sunak, with Treasury officials having briefed for days that the scheme would be cut from 80 per cent support to 60 per cent. Boris Johnson clearly came down in favour of supporting the economy this time, but how much longer can it continue?
– Someone has to foot the bill –
However much Johnson and Sunak spend, how they choose to finance it will have enormous consequences for Britain’s future. The shockwaves and the scarring of the 2008 crisis were still being felt when the coronavirus erupted, those from 2020 could last much longer.
There will be huge questions of intergenerational fairness thrown up by post-pandemic fiscal decisions, while, as Russell Lynch points out, Johnson’s fiscal room for grand projects and levelling-up the regions is likely gone already.
The PM and his chief adviser, Dominic Cummings, had also hoped to transform the economy, abandoning “legacy” industries and forging new, high-tech ones. Will the public and the economy be in a position to sustain the short-term pain necessary for such a shift? Or will Downing Street see it as an opportunity to accelerate the change?