Issue of the week: the nation’s finances
The lockdown is already causing cracks in the public finances. What decisions must be taken to fill them?
The Treasury went cap in hand to the Bank of England last week for “a big overdraft” extension, said Nils Pratley in The Guardian. It was tactfully done via an existing facility known as the “ways and means” account – doubtless to avoid any mention of “helicopters or magic money trees” that could scare the horses. The Treasury was at pains to state the cash would be repaid by Christmas. One can understand the caution: “temporary measures, adopted in the midst of crisis, have a habit of becoming permanent”. And since Covid-19 is “likely to blow a bigger hole in the nation’s finances than the banking mess did, almost anything seems possible now”. Just a month ago, UK borrowing was predicted to be 2.4% of GDP this financial year. Now the consensus forecast is 10%, or roughly £200bn – and that assumes normal life returns by late summer. “Large cracks are appearing in the public finances. Truly unconventional policies may yet be deemed necessary to fill them.”
I don’t want “to add to the mood of concern”, said David Smith in The Sunday Times, but another spectre from the past has returned to haunt us. Some economists are worried that, even as we dive into recession, “this great modern plague will be followed by a great inflation”. The combination of ultra-low interest rates, and other central-bank easing measures, and “an explosion” of budget deficits “is sending a big inflation warning”, they argue. Economist Tim Congdon foresees a UK inflation rate “closer to 10%” than we have seen for years, and he isn’t alone. Scary stuff? Actually, it could go either way, said Jeremy Warner in The Sunday Telegraph. Much depends on how quickly we can bring this “unsettling lockdown” to an end. “Deflation or inflation? Pick your poison.” But bear in mind that “almost anything” will be preferable to “deflationary depression”.
Despite Chancellor Rishi Sunak’s “lavish” stimulus package, he is reportedly “now warning colleagues” that GDP – “a snapshot of the economy itself” – could fall by 30% between April and June in a worse-case scenario, said Alex Brummer in the Daily Mail. “Put another way, on average each of us could be one-third poorer” than when the pandemic arrived. No one can fail to be moved by stories of untimely deaths, “but we cannot ignore the economic and commercial consequences of the lockdown”. There are still optimists around: many economists believe the UK “could bounce back by next year”. But that will depend on the Government having a sensible plan to revive the economy before the damage wipes out “great swathes of business and millions of jobs”. The lockdown cannot go on forever. Taking a call on when to end it will be the “ultimate test for politicians”.