Obviously the most devastating consequence of the COVID-19 pandemic is the loss of life and the subsequent grief. It is the burden of leadership to have to consider the multiple elements of a crisis simultaneously. An unenviable responsibility to constantly reassess, prioritise and proactively choose the best course of action for everyone.
And for a country one of the most crucial factors is the economy. Not only the immediate financial support for individuals and businesses, but planning for a post-crisis future. How is it all going to be paid for?
What is the bill for coronavirus measures?
We can only work with a running total at the moment. It’s difficult to accurately estimate what the final total will be. The Office of Budget Responsibility (OBR) have given an estimated cost of £298billion for the 2020-21 tax year. (That’s from April 6th 2020 to April 5th 2021.)
This number is so enormous that it loses its meaning to those of us who deal, at most, in thousands of pounds.
To put it in the context of the government’s pre-COVID figures allows us some perspective. The annual borrowing estimate for the 2020-21 tax year was £55billion. We borrowed £62.1billion in April alone. The Coronavirus Job Retention Scheme, for furloughing employees, will cost £123billion according to the OBR.
Tax takings down
It’s not just about spending to support people through the crisis. The government has less ‘income’ from our taxes because of the lockdown’s impact on the economy. It’s not just that we’re not shopping as much, although that will lead to less VAT revenue. The Treasury receives less income tax takings because of furloughed and unemployed individuals. And less tax from businesses because their profits are down, therefore their tax payments are less.
A Treasury document that was leaked to the press estimates that the lost tax revenue could total £337billion.
How can the government make its money back?
Well, the government can borrow from individuals, other governments, pension funds and companies that invest by buying bonds. These bonds are a promise to repay their value in the future, with only interest payments due in the meantime.
How much does debt cost the country?
The UK’s existing, pre-COVID debt has been negotiated at very low interest rates, with minimal difficulty. We will have a problem if the interest payments become too expensive. This ‘too expensive’ amount and therefore the government’s borrowing limit is an unknown.
But the longer the crisis continues, the longer the recovery and the more borrowing may be a necessity. As with any household budget, the amount going out needs to be balanced with what’s coming in. The government calls the difference between the two figures the deficit.
So, will taxes go up?
The government has the same choices as we have to balance the books – borrow more and spend less. But they also have the option to increase taxes. We don’t yet know what combination of measures the government will choose.
The Conservative 2019 Manifesto gave guarantees about both taxation and government spending which may influence the decisions about the post-COVID economy.
- No raise of NICs, income tax or VAT – these three taxes combine to total half of the Treasury’s overall revenue.
- The know that making people pay any more tax means that they have less money to spend, which slows economic recovery.
- 10 years of austerity means that there’s little fat to trim from public spending.
- There will be little appetite for any cuts to healthcare spending, for obvious reasons.
- A guarantee was given that state pensions would rise by 2% every year, in a ‘triple lock’ arrangement.
The short answer is that we don’t know if the government will raise taxes to pay for the massive cost of the pandemic. It is one option available to them, amongst a range of equally unpopular possibilities. We will have to wait and see.