The pandemic caused the UK’s deepest economic downturn in three centuries.
Our financially troubled government has lived on ticks since the first lockdown.
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How Rishi Sunak could use his budget to pull the economy off the Bank of England’s money tree
In the House of Commons on Wednesday, Rishi Sunak’s budget declaration will confirm the largest annual deficit in our history.
The government borrowed a staggering £ 400 billion last year – eight times more than in 2019.
However, the Chancellor will roll the dice again. He’ll risk even higher borrowing to keep the economy moving before Covid restrictions are finally eased.
Will this gamble pay off as more public spending spurs growth and creates a post-lockdown boom? Or will it make Britain bankrupt for good? The government has spent huge sums on vacation pay, business support programs and measures to fight Covid.
However, the Chancellor will roll the dice again, risking even higher borrowing to keep the economy moving before Covid restrictions are finally easedPhoto credit: EPA
Our blocked economy had problems generating taxes in the meantime.
This has opened a big hole in public finances, and this year’s billions of pounds deficit adds to our already enormous national debt.
After the financial crisis of 2008, public debt rose from 35 percent of national income to 80 percent due to bank bailouts and sluggish growth. Thanks to Covid, this debt burden is even higher.
For the first time since World War II, national debt has now grown larger than the economy as a whole – at 101 percent of GDP.
The government debt mountain just exceeded £ 2 trillion: £ 30,000 for every man, woman and child.
A one percentage point rise above all interest rates adds an additional £ 25 billion a year to the government’s cost of servicing the national debt.
Our frozen economy has problems generating taxes and has opened a large hole in public financesCredit: Alamy Live News
Ambitious economists urge ministers not to worry about our public finances. That is terrible advice.
As he is thinking about his budget this weekend, Mr. Sunak’s options are very limited. One way is to tackle our huge debts by raising taxes. But doing that now would slow the recovery from Covid before it began. A £ 40 billion increase in additional income – just a tenth of this year’s borrowing – would mean the property tax rate rise from 20p a pound to 29p a pound. That would do more harm than good.
Or the VAT would have to rise from 20 to 26 pence – again a political non-starter. A justified tax hike would be an online retail levy paid by Amazon and other ecommerce giants whose profits rose during the lockdown.
It could give retailers a chance once non-essential stores reopen. The only tax hike that seems certain Wednesday is a rise in corporate income tax, which brings in only a few billion each year. That will not weigh on our massive mountain of debt. But it will signal to the government that public finances will have to be fixed at some point.
In the meantime, national accounts will look a lot worse before they look better, and Mr Sunak will bet on keeping the spending lock gates open.
Raising £ 40 billion in additional revenue – just a tenth of this year’s borrowing – would mean raising the property tax rate of 20p a pound – a political no-starterPhoto credit: Rex Features
Yes, our national debt is enormous. But the Chancellor will up the ante, suggesting that even more government spending will trigger rapid growth after the lockdown.
That should generate more taxes as the economy expands and help pay off our debts while avoiding sky-high tax rates and deep cuts in austerity. It is a risky game of chance that will increase our national debt even further. However, two post-lockdown risks are even greater.
The first is unemployment – officially 1.7 million or 5.1 percent of the workforce. This is still quite low in historical comparison.
However, the number of beneficiaries and HM Revenue & Customs salary data suggest that the actual unemployment rate is already much higher. In addition, 4.7 million workers were on vacation at the end of January, which had risen sharply after stricter lockdown restrictions.
A justified tax hike would be an online retail levy paid by Amazon and other ecommerce giants whose profits rose during the lockdown
While Mr. Sunak will extend the vacation past the current April 30 end date, the program costs billions each month and cannot continue forever. However, if only a third of those on leave become unemployed, unemployment will spike well over three million – to a level that rocked British politics in the early 1980s. Opinion polls suggest that an even higher proportion of workers on leave could ultimately lose their jobs.
“We are concerned that the government is falling into an unemployment crisis,” wrote Michael Forsyth, chairman of the Lords Economic Affairs Committee, in a letter to the Chancellor this weekend.
Former Tory cabinet minister and his committee of economic heavyweights want Mr. Sunak’s budget to “shift public spending away from job protection to job creation.” The chancellor’s risky spending game is based on an even riskier strategy.
In addition to the more common government bonds to support spending, much of the lockdown credit was funded by the Bank of England’s magical money tree – that is, quantitative easing or newly created money.
Will the Chancellor’s gambling pay off as more public spending spurs growth and a post-lockdown boom?Credit: AFP or Licensor
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And when too much additional spending depends on such money pressures, history warns of inflation and financial collapse. After the lockdown, it is measures that boost business, investment and jobs, not magic money, that will restore economic prosperity and help repay the government’s massive pandemic debt.
But the longer the lockdown goes on and the more debt accumulates, the riskier our economic gambling is.
Mr. Sunak has been a happy Chancellor so far. We have to hope that his luck lasts.
But the longer the lockdown goes on and the more debt accumulates, the riskier our economic gambling isPhoto credit: Rex Features
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