BORROWING BINGE HITS £300bn
Deficit at record levels as cost of pandemic mounts
by James Salmon THE spiralling cost of subsidising the wages of millions of workers could push Britain’s budget deficit well above £300bn, the Treasury watchdog has warned.
The Office for Budget Responsibility revealed the outlook for public finances has deteriorated rapidly, with the estimated bill for rescuing the economy mounting by £20bn in the last few weeks.
As it emerged that 441,000 selfemployed workers had claimed subsidies worth £1.3bn on the first day of a new bailout scheme, the OBR spelled out the staggering cost of the Government’s rescue measures.
In its latest report, it predicted that ministers face a budget deficit of £298.4bn this financial year but warned it could be significantly higher.
This is because it has not included the cost of extending the Job Retention Scheme for furloughed employees until the autumn, which it said push the bill up to £84bn. In the Budget in March, the OBR forecast a deficit of £55bn this year.
A few weeks ago, the watchdog raised this to £273bn – which would already be the highest since the Second World War – as the cost of the pandemic started to pile up. But it now estimates measures to prop up the economy during the crisis will cost £123bn this year, £20bn more than it predicted last month, pushing the deficit even higher. The OBR stuck by its initial prediction that the economy would shrink by 35pc in the second quarter before bouncing back by 27pc between July and September.
And it also kept to its prediction that unemployment will more than double to 10pc in the second quarter, as more than 2m people are thrown out of work.
The staggering burden on the public finances will fuel fears that taxes will have to rise to pay the debt, and that the Covid-19 crisis will usher in another era of austerity. The possibility of tax rises and spending cuts was raised this week in a leaked Treasury report, which has caused alarm among some Tory MPs who believe this will hamper any recovery. The Treasury report warned the deficit could be £337bn this year, even higher than predicted by the OBR.
But yesterday Bank of England governor Andrew Bailey doubled down on claims that the Government’s vastly expensive bail-out package would help Britain’s economy bounce back quickly after the end of the lockdown.
Speaking at a conference, he suggested policies like the Job Retention Scheme would ‘preserve people’s livelihoods and incomes and prevent a bigger rise in unemployment’.
The Bank has warned the UK is facing its worst recession in 300 years but insisted it will recover strongly next year. Bailey said: ‘There is reason to believe if the recovery operates in the way I suggest, we can imagine a lot of jobs and a lot of activity will come back at the point when the restrictions are lifted and people get confident about going about their daily lives and their jobs.’
The mounting deficit predicted by the OBR is mainly due to Chancellor Rishi Sunak’s decision to extend the Job Retention Scheme until the end of October. It had been due to finish at the end of May, and the OBR estimated it would cost £42bn.
But the watchdog said extending the lifeline to the end of July will push the bill up to £63bn, and that extending it to October could cost another £21bn.
Latest figures show that 7.5m workers have been signed up by their employer for the Job Retention Scheme, which pays 80pc of their salaries up to £2,500 a month. The sister scheme for self-employed workers was launched on Monday, with HMRC swamped with applications.