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So this is Christmas. All across the country, hopes for a rapid end to the coronavirus pandemic have been painfully extinguished. For many, the festive season was already shaping up to be anything but. Now, at the last minute, tougher restrictions for much of south-east England, Scotland, Wales and Northern Ireland have been put in place.
But while much of the focus will be on Christmas, the big problem for Britain is that these tougher controls will probably be kept in place for longer than anticipated, well beyond 25 December. Deeper lockdowns at the start of 2021 are all but certain. With a faster infection rate because of the mutant Covid-19 strain, a faster vaccination rate will also be needed before restrictions can be relaxed.
Tacit acknowledgment of this was made last week when Rishi Sunak unexpectedly announced an extension to the furlough scheme until the end of April, a month longer than planned, alongside measures to extend the availability of government-backed business loans and announcing a budget for 6 March. This, we are told, is when the government will “deliver the next phase of the plan to tackle the virus and protect jobs”.
But if the chancellor thinks adequate support measures are in place to help Britain through this bleak winter until the spring budget, he would be badly mistaken. Pressure is mounting for a further package of economic support from the start of the year.
There is, however, concern that people and businesses struggling through may find the next phase of the government support fails to meet what is required. On the same day as announcing the latest furlough extension, the chancellor used an interview with the rightwing Spectator magazine to say that continued high levels of government borrowing were morally wrong, in a sign that record spending is on it its way out, not about to get more substantial.
On Tuesday, the latest official estimate for the black hole in the government finances will be published, setting out the scale of the budget deficit – the gap between spending and tax revenue – and the national debt – the sum total of every deficit.
The deficit is expected to peak at about £394bn this year, in turn pushing the national debt north of £2tn. This is equivalent to more than 100% of gross domestic product and scales heights unseen since the early 1960s.
“It is clearly not sustainable to borrow at these levels. I don’t think morally, economically or politically it would be right,” Sunak said.
If this sounds familiar, it’s because it is the same argument made by George Osborne after the 2008 financial crisis to justify his austerity agenda, as the Conservatives set about launching the biggest ideologically driven attack on the state since Margaret Thatcher in the 1980s. The deficit was then, and remains today, a convenient excuse.
Rather than a moral obligation to a number on a computer screen deep in the bowels of Whitehall, the chancellor’s real duty should be to the millions of people in Britain struggling to make ends meet during the worst recession in three centuries.
Instead, there are yet more warnings of hard choices and moral obligations. Such is the squeamishness among Conservatives to intervene in the economy that he feels a need to act tough in a rightwing magazine. But is the chancellor really the hardman of fiscal conservatism he makes out to be? Or looking two ways at once – acting tough for the Tory crowd while continuing to pump additional support into the economy when required.
Although these numbers may sound scary, it is worth remembering that the cost of financing this debt plunged to the lowest level since the 1690s, with interest rates on government bonds collapsing this year – aided by the Bank of England cutting interest rates close to zero and ramping up its quantitative-easing bond-buying programme, matching the actions of central banks around the world during the pandemic.
Despite this ever-increasing debt mountain, total debt interest payments have fallen this year by £13bn, to only £23.5bn, and are expected to remain below pre-pandemic levels for at least the next five years.
Britain isn’t alone. The US national debt has surged to more than $27tn. Japan’s debt has been worth more than 100% of national output for more than two decades.
Consider what these vast sums represent and ask whether Britain would be better or worse without them. Furlough, extra funds for the NHS, test and trace, PPE, key workers’ wages, transport, schools.
When the pandemic finally recedes, much of the annual increase in borrowing will recede with it, as emergency spending is scaled back and the economy regains strength. The severity of the crisis means there will be lasting scarring for the economy, reducing Britain’s capacity to maintain higher levels of tax and spending. But failure to provide further support as the crisis worsens once again, and cutting back spending too soon, would leave deeper scars for the economy.
Sunak’s big concern about the national debt is that current record low borrowing costs won’t last long. And there are some causes for concern on the horizon. Inflation expectations for next year are starting to pick up, amid hopes that Covid-19 vaccines can deliver a faster economic recovery. A rise in inflation would force interest rates higher.
Brexit could produce a further short-term burst of inflation. Meanwhile, there are warnings in a new book by the academic Charles Goodhart and his co-author, Manoj Pradhan – The Great Demographic Reversal – that we could be heading for a renewed inflationary period driven by ageing populations and a fragmenting global economy.
Politicians must keep an eye on future risks. As the Covid pandemic shows, the potential for an economic shock out of the cold blue sky can never be underestimated. But the bigger danger here is that Sunak will shift policy to prepare for the potential needs of the future – before we are even sure these risks will crystallise – while neglecting the very real and immediate problems of the present.
While the government must act to safeguard public health, it must also cushion the economic fallout of its actions. You don’t need the benefit of hindsight to know that Boris Johnson effectively cancelling Christmas at the last minute, without warning – only days after labelling such a move inhuman – will come as a hammer blow for a weary nation.
With businesses on the edge and growing numbers of people at risk of financial hardship at the start of 2021, it would be unconscionable for the chancellor not to act. That is the moral obligation to which he should be held.
Source: The Guardian
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