With the UK government spending billions to try and mitigate the economic damage of Covid-19, many analysts are beginning to question where the money to pay for this is going to come from.
The Sunday Times reports Chancellor Rishi Sunak is appraising his options to ease the effects of the coronavirus lockdown and claw back some of the £48.7bn borrowed by the government to pay furloughed staff wages among other measures.
As lockdown is ending, short-term measures may be used to try and stimulate the economy, potentially encouraging a recovery. More long-term measures however will be aimed at reducing the government deficit.
Any of the measures being considered will inevitably have a great impact on ordinary British lives, and with years of austerity fresh in the public mind many will not want a return to such drastic cuts. The Chancellor’s hopes are also likely reliant on a continuing steady decline of the Covid-19 virus in the near future. As cases in the US and Europe grow however, fears are rising of a second wave that could be mirrored in the UK as lockdown restriction ease.
How will next year's budget shape up for Chancellor Rishi Sunak?
In the short-term two of the options currently under consideration by the Chancellor include cutting VAT to 17%, and reducing employers’ national insurance (NI) contributions.
A cut to VAT, reported to be from 20% down to 17%, would be intended to stimulate spending. It would, however, also cut treasury income, therefore any cut will likely be short-term and may coincide with other tax increases to bring down the deficit.
Similarly, a cut in employers’ national insurance (NI) contributions would hopefully encourage employers to keep existing employees during the economic downturn, while potentially bringing fresh recruitment and kickstart the jobs' market. However, with rocketing costs during the crisis, cuts in employer contributions are again likely to be short lived.
In the longer-term Chancellor Sunak is reported to be considering scrapping the state pension ‘triple lock’, and cutting public spending, while likely returning VAT to the 20% levels once the economy had sufficiently recovered.
The ‘triple lock’ on pensions guarantees the basic state pension will rise by either the rate of inflation, average earnings growth, or at the least 2.5%. The scheme was introduced by the 2011 coalition and continuing it was a government election pledge. Despite this, the unprecedented financial impact of the pandemic may see them renege on the pledge.
Further assaults on pensions could save considerable sums for the government, but risk alienating the growing number of voters for whom pension is a concern. Further increases to the pensionable age, taxes on pensions and means testing are options that could be on the table.
Public spending has only recently begun to grow after years of austerity following the last financial crisis. Former chancellor Sajid Javid has warned against reducing spending and returning to levels of austerity under George Osborne. Despite this, the current Chancellor is between a rock and a hard place when it comes to spending.
The Government Major Projects Portfolio (GMPP, ‘the portfolio’) contains around 130 of their most expensive plans. They are projected to cost nearly £450bn. Many could be scrapped, if the projects are deemed too expensive or unnecessary.
HS2 has been opposed by landowners and conservationists alike. It was budgeted to cost just under £56bn in 2015. However, according to an official review leaked to the Financial Times in January this has nearly doubled and has risen to £106bn.
Replacing the ageing Vanguard class, four Dreadnought submarines coming into service in the 2030s, will cost £31bn – £41bn for construction and £10bn for further contingencies.
In addition to these two, there are major IT projects across all government departments and major transformations to how public services are delivered, such as the reform of the courts and tribunals system. In light of the latest sudden need to reduce government spending all of the above are under deep scrutiny.
Finally, there is Brexit. With the deadline still ticking away, the true cost of Brexit is not known. There have been estimates that the process could cost £130 billion, while figures from the Office for Budget Responsibility put the cost of a financial settlement with the EU to around £222 billion in real terms. This does little to help the nation’s economy post-pandemic or potentially while still in the midst of the pandemic given current estimates for a viable vaccine.
As we hopefully come out of the current health crisis, the Chancellor's decisions will be crucial to the UK's economic future. Investors will be following closely and many are already taking their own measures to protect their wealth against these uncertain times.