UK finances were close to collapse United Kingdom

The Bank of England was forced to save the British Government from potential financial collapse as markets seized up at the height of the coronavirus crisis, Governor Andrew Bailey has said.

Bailey said ‘‘serious disorder’’ broke out after panicking investors sold UK government bonds in a desperate hunt for cash.

It left Britain at risk of failing to auction off the gilts needed to fund crucial spending and Threadneedle Street had to pump £200billion

(NZ$385 billion) into the markets to restore a semblance of order.

Bailey told Sky News that without the emergency move ‘‘the prospects would have been very bad. It would have been very serious’’. He added: ‘‘I think we would have a situation where in the worst element, the Government would have struggled to fund itself in the short run.’’

The intervention to prop up the gilt market was expanded last week by the Bank’s Monetary Policy Committee with a further

£100billion (NZ$192.8 billion) although Bailey warned explicitly yesterday (local time) that this support for financial markets will not last forever. Any wind-down will pile further pressure on the Treasury’s funding costs as Chancellor Rishi Sunak faces a deficit of at least

£300billion (NZ$577.9 billion) this year. Sunak is said to be considering a VAT cut followed by tax rises over the longer term, but economists remain divided. Lord Darling, the former chancellor, proposed a VAT cut to boost consumption, following his own decision to do so in 2008. But Julian Jessop, of a fellow at the Institute of Economic Affairs, said: ‘‘It makes far more sense just to open the shops, pubs and restaurants and cut employer insurance contributions. People would be far more likely to spend if they knew their jobs were safe.’’

Richard Hyman, an independent retail analyst, warned that online retailers such as Amazon, rather than bricks-and-mortar shops, would be the main beneficiaries of cutting VAT. ‘‘Retail needs whatever help it can get but a VAT cut won’t necessarily make a massive difference in the short term to most physical retailers.’’

The Federation of Small Businesses backed Lord Darling’s call for a temporary VAT cut, but added that Sunak should cut employers’ national insurance contributions (NICs) to encourage job creation. The Institute of Directors also suggested raising the threshold for employers’ NICs after its latest — confidence tracker showed that hiring and investment intentions among members for the year ahead had hit — record lows.

It came as a separate survey revealed households are deeply pessimistic over job security amid fears of a second wave of redundancies when the furlough scheme ends. IHS Markit’s household finance index climbed to just 36.7 in June, up marginally from April’s record low of 32 but still at levels never seen before the covid crisis. A score below 50 signals a deterioration in sentiment. - The Daily Telegraph