Spending on a scale not seen in peacetime will be worth every penny

It could take two generations to pay off the cost of Chancellor Rishi Sunak’s staggering coronavirus rescue plan for the UK economy, but it will be worth every penny.

Sunak described it as “unprecedented” and he is right, at least in peacetime. The only thing that comes close is the rescue of the banks in 2008: that cost £130billion, and less than £30billion is outstanding.

But the fight against the deadly Covid-19 demands even bigger efforts, approaching those only seen in wars of survival, when the fundamental first duty of the nation state to protect its citizens comes to the fore.

This by necessity takes numbers of unimaginable size. On the outbreak of World War Two , Sir John Simon, the chancellor, raised borrowing by £700million – £46billion in today’s money. It was only in 2006 that the UK finally paid off its last instalment of post-war reconstruction loans made by the US and Canada under the Marshall Plan.

The Chancellor’s mind-boggling scheme to pay 80 per cent of salaries to companies for retained staff for an initial 12 weeks is not quite on that scale, but monumental by conventional standards. The only thing similar is Germany’s Kurzarbeitergeld, a much smallerscale subsidy for manufacturers to smooth employment over the industrial cycle. If you look at our £2trillion a year economy measured by incomes, the salaries of employees account for around half. So over one quarter at least, Sunak is committing to a stimulus in theory worth around 12.5pc of GDP, about £250billion.

Even if you assumed only 50 per cent of employers applied, or only used it to furlough part of the workforce, the cost of this is likely to be in the tens of billions. If extended for two or three quarters, it could be in the hundreds of billions.

The Chancellor has also unveiled £330billion in loan guarantees as part of his response, but under that scheme the Government only pays out if the loan defaults. The wage subsidy amounts to billions in real spending, now. Add in the vast tax levers that the Government is pulling, such as deferred VAT and business rates holidays, and it is easy to see the deficit shooting into double figures this year.

It means we’ll be tapping debt markets at a rate barely seen outside a war, and it may see our borrowings as a share of the economy come close to 100 per cent. But these metrics signify very little against the cold reality of an economy about to go into virtual hibernation for three months or possibly longer.

Fiscal conservatives fretting about the size of the national debt would almost certainly have a lot more to worry about if we allowed tens of thousands of viable businesses to go to the wall, permanently impairing the growth potential of the economy. By going down the path of paying businesses directly, rather than just handing out cheques to sacked workers, Sunak stands more chance of shaking the economy out of the deep freeze more quickly. Despite the current market disruptions, long-term appetite for the UK’S debt is strong.

Against spending on this scale it is strange to think that just a few months ago Sunak’s predecessor, Sajid Javid, was boasting about a spending increase of £13.4billion this year. Those numbers are now small change in the coronavirus fight. The hawks may worry about the long run for the public finances but the battle is now, and as John Maynard Keynes famously said: “In the long run we are all dead.”