Opinion: How are we going to pay for all this? Keep spending

There are murmurs that the Treasury is considering spending cuts and tax hikes to pay for what could be a £330 billion budget deficit in this financial year. Richard Dawson discusses why this might be a bad idea

With Government spending set to reach levels not seen since the Second World War, it’s fair to say the Treasury has got its cheque book out.

The massive and unique fiscal programme announced by Chancellor Rishi Sunak is matched only by the scale of the economic challenges unleashed by the coronavirus pandemic.

People have grown tired of the word unprecedented, but it is certainly the case that we have never seen spending like this in peacetime.

For example, the Coronavirus Job Retention Scheme (CJRS), which has helped to prevent millions of British workers from losing their jobs, costs an estimated £14 billion per month – the same amount as monthly bills for the entire NHS.

Figures produced by the Office for Budget Responsibility (OBR) on April 14 and updated today (May 14) also show that additional funding to health services, local authorities, rail services and the devolved administrations has a combined cost of £15 billion.

In addition, the Government’s business grants to SMEs and those operating in the leisure, tourism and hospitality industry are costing £15 billion while the business rates holiday costs £13 billion.

The income protection scheme for the self-employed is estimated at £10.5 billion and additional welfare payments at £8 billion.

In the same report, the OBR published an illustrative economic scenario wherein UK GDP could fall by 12.8 per cent in 2020.

When taken together, the reality of rising public expenditure and falling tax receipts creates a perfect storm for the UK budget deficit.

The Treasury’s latest base case scenario, obtained by the Telegraph newspaper yesterday (May 13), forecasts a staggering £337 billion budget deficit in the financial year 2020/21.

As a point of reference, the UK budget deficit for the financial year ending March 2019 was £25 billion – 13 times lower than this projection.

The prospect of such an eye-watering sum, weighing down on the public finances, will no doubt be causing unease at the Treasury.

As the public health situation improves, the question on many people’s minds will be: how are we going to pay for all this?

If the document obtained by the Telegraph is correct, then it looks as if the Chancellor may be considering a ‘policy package’ of tax rises and spending cuts to try and shore up investor confidence and fiscal credibility.

Austerity, as it is often referred to, has become widely unpopular in the ten years since it was first implemented in the UK following the last financial crisis.

Many economists believe that while achieving its ultimate goal of reducing the budget deficit, austerity stifled the economic recovery and held back growth in the early part of this decade.

That is the fear this time around too.

As Bill Blain, market strategist at Shard Capital, says: “If we don’t choose the right policies/treatments to address the deepening economic catastrophe, then we’re doomed.”

To be fair to the Government, the spending taps have run virtually unrestricted since the crisis started.

Just a few short months ago, the CJRS, which is effectively a nationalisation of the wages of British workers, would have been unthinkable, especially coming from a Conservative administration.

But as the immediate shock gives way to something like a recovery, the temptation to reduce outgoings will grow.

For, if a household is spending more than it brings in, then naturally the right course of action is to reduce outgoings to try and make up the difference. But the economy is not the same as the household or indeed a business for that matter.

The Government is not bound by the same financial rules as the rest of us.

In an era of record low interest rates, the Government’s ability to borrow is almost limitless and as such, spending should be based on what is going to stimulate economic activity.

Government spending acts as a guide for how the rest of the economy behaves, from the level of the consumer up to the corporate board room.

Bill explains: “Every single corporate on the planet is going to figure out the outlook. If they are watching and listening to governments rein in spending too early and institute austerity spending, then they will predict and prepare for a deeper recession.

“If every corporate is cutting investment plans, reducing headcount, and instituting cost controls, then the economic effect is inevitable; rising unemployment and an ongoing demand shock.”

There will be a time to have a conversation about how best to bring down public expenditure. A £330 billion budget deficit is clearly unsustainable.

But talk of spending cuts and tax rises at a time when the real economy is so vulnerable would be a backward step.

The easiest way to overcome the towering indebtedness we now face as a country is to get the economy back to growth as quickly as possible.

For that to happen, the only policy package the Chancellor should be looking at now is the one that says, “keep spending”.