PM was already indulging in massive pump-priming before virus struck
How do you comprehend the sum of £2trillion, the figure just reached by government debt? It helps that it happens to be almost exactly the value of the UK economy – the sum total of all goods and services produced in Britain last year.
It is a level of debt the UK learnt to live with during and after the Second World War, but not since 1964 has the government owed a sum in excess of UK GDP.
More alarming still is the rate at which debt has grown since the start of lockdown. In the first four months of the financial year, the Government borrowed £150.5billion – as much as the annual deficit run by Gordon Brown in the wake of the 2008/09 financial crisis, which felt like a fiscal cataclysm at the time. In July alone, Rishi Sunak was forced to borrow £26.7billion – this in a month in which the government usually runs a surplus thanks to self-assessment tax receipts. This year, however, those receipts were just £4.8billion – less than half the £9.3billion received last year.
Public debt of £2trillion has been a long time in the making. Governments have only managed to balance the books in six of the past 50 years, and not once since 2001. Fail to fix the roof when the sun is shining, as the saying goes, and you can expect a hell of a deluge when it starts to rain. As in any recession, the Chancellor has been hit with a double whammy: lower tax receipts, as companies make less profit and individuals lose their jobs, combined with greater expenditure as demand for welfare, subsidies and stimulus increases.
The furlough scheme, covering up to 80 per cent of idle workers’ salaries, cost £30billion up to the end of July.
“Bounceback” loans and business interruption grants cost £10 billion in England and £4.7billion in the rest of the UK, while the Eat Out to Help Out scheme, which subsidises meals out in August, is expected to have cost £500million by the end of the month.
It is one thing showering money to lift the economy out of a crisis, but the Government was already indulging in massive Keynesian pump-priming before Covid struck – behaving as if we were already in a crisis. In January, for example, the Prime Minister made the decision to go ahead with HS2 in spite of warnings that it could cost £106billion. During last year’s election campaign, Boris Johnson promised an extra £34billion a year for the NHS. Unless he is prepared to go back on these pledges, he is now going to be forced to finance them from an economy that is almost certainly going to be markedly smaller over the next few years than it was expected to be.
Some say interest rates are so low that debt no longer matters. Yet even with near-zero rates, the Government spent £56billion last year servicing its debts – more than the £55billion spent on defence, £44 billion on transport or £38 billion on public order and safety.
No one can say that the benign rates of the past 25 years must continue, or that we won’t be back to double digit rates at some point. Sooner or later, the PM and Chancellor will have to decide how to bridge the gulf between income and expenditure other than through borrowing – either by slashing spending, raising taxes or a mixture of both. No option is easy.
Mr Johnson has tied the Government’s hands behind its back by promising not to hike income tax, national insurance or VAT. That has left the Treasury scrabbling for alternatives such as charging capital gains tax on main homes – undermining the Tories’ claim to be the party of home-ownership – or slashing tax relief on pensions, which would be portrayed as a tax on thrift and a disincentive to save for old age. Both would be opposed within the Conservative Party. But then so would spending cuts. After all, Mr Johnson has denounced austerity, making it extremely hard for him to make even token cuts. On the contrary, his pitch to the “red wall” seats that he won from Labour last December was very much based on increased spending.
To put the Government’s fiscal predicament into political perspective, Jeremy Corbyn’s 2019 manifesto, damned even by some within Labour for the scale of its promises, proposed an extra £79billion of spending a year. The PM’S Government has been forced to borrow nearly twice this sum in just four months. Having out-corbyned Corbyn, Mr Johnson now faces the painful prospect of a fiscal crisis at the same time he has to sell a post-brexit Britain to international investors – something which may demand extensive tax cuts for businesses. It was hard to envy Brown’s position at the end of the 2008-09 crisis, but Boris Johnson’s is infinitely tougher.