Chancellor Rishi Sunak acted fast to rescue the economy, now he has to work out how Britain pays the bill
How do we pay the bill for the coronavirus crisis?
Britain is a long way from business as usual, but ONS figures showing an astonishing 6.3million workers being paid by the taxpayer were enough to shock most of us – even in these strange times.
These official figures showed that about a fifth of British workers have been furloughed, with the state picking up 80 per cent of their wages.
Just six months ago, in the run-up to the General Election we were debating how the country could afford the NHS.
Now, we have a bill equivalent to two National Health Services to worry about, with the furlough scheme estimated to cost as much as the NHS in some scenarios.
In addition to this, the UK has seen an extra 2 million people apply for unemployment benefits since the lockdown began in late March.
The furlough scheme was designed in a hurry to stem a tide of redundancies, as the consumer economy was paused and businesses were told to either work from home, or cease trading, unless they were deemed essential.
The idea of a mass state expansion into paying people 80 per cent of their wages, up to £30,000 a year, to do nothing, is something that makes many of us feel decidedly economically queasy.
Yet, it is almost certain that without furloughing there would have been a huge wave of job losses.
The best possible chance the economy has of recovery comes from keeping as many workers on companies’ books as possible and making sure people can pay the bills that will keep coming while the pause button on doing business is pressed.
On that basis, I can buy the concept of the furlough scheme, although I’m not 100 per cent convinced.
The difficulty the Government faces now is how to start unwinding it before we end up with a fifth of the workforce and their employers expecting the tab will continue to be paid for the foreseeable future.
This needs to be done without creating a cliff-edge scenario at the end of June when the furlough scheme is due to end – the deadline already having been pushed back from the end of May.
Unemployment will inevitably rise, but how do you temper that rather than simply see joblessness rocket?
There are all kinds of suggestions, ranging from cutting furlough pay to 60 per cent, to allowing part-time work and only including certain sectors. All come with a host of potential knock-on problems.
Compounding the issue, is that Chancellor Rishi Sunak has to work his way through this puzzle without knowing what the rules are, because we don’t yet know how Britain will get back to business and whether things will need to be paused again.
On top of that, it’s not just the furlough bill we need to worry about.
There is the cost of Coronavirus Business Interruption Loans, Bounce Back Loans, the various Covid-19 related grants, and the help for the self-employed, which is less generous than furloughing and has left lots of people slipping through the cracks.
And while all this has been going on, Britain has been busily taking on its own emergency loans to deal with coronavirus.
The IFS’s chart highlights how the desire to raise £45billion from gilt sales in April outstripped UK government debt issuance in any month, including the financial crisis
At the start of April, the Debt Management Office revealed that it would seek to raise an extra £45billion from gilt auctions selling UK Government bonds last month.
The IFS commented that is three times the largest amount raised in any single month last year and outstrips even the peak during the financial crisis.
It then emerged that the Government would borrow billions of pounds from its emergency overdraft with the Bank of England to fund fighting coronavirus.
This Ways and Means facility was extended to an effectively unlimited amount, leading to claims that the UK was dabbling with ‘monetary financing’ – as creating money to fund spending is known.
What do we do to pay all this extra borrowing off?
One option is to raise taxes in future. The problem is the bill for coronavirus is so great that when added to the other spending commitments we were already worrying about, taxes would have to rise a lot to cover it – and not just for the rich.
Tax rises on that scale to cover stuff we’ve already spent the money on would be deflationary and there is a broad consensus that’s the opposite of what governments will be hoping for after all this.
The post financial crisis economic tactic was financial repression, which involves allowing inflation to run above interest rates, so that debt is eaten away over time.
If you don’t want to raise taxes, you could cut spending. But there’s a problem with that too, ideally you spend more in recession to boost the economy.
In 2008, proponents of cuts could argue that the state was bloated, however, we’re going into the coronavirus crisis on the back of a decade of austerity.
Boris Johnson was never an enthusiast for austerity and the Prime Minister’s reply to a question on its return the other day indicated that mood’s not changed.
Our options for settling the coronavirus bill look pretty limited – and arguably that’s the same for almost every major developed western economy.
That leaves one outlier that’s likely to be talked about a lot more in months to come: the world clears its coronavirus debts, with some form of orchestrated one-off move involving countries printing money to buy their own debt and then write it off.
This is an outlandish and unpalatable economic suggestion to many, including your correspondent, but we went through the financial looking glass a long time ago, so don’t discount it happening.
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