Caroline Elsom is a Senior Researcher at the Centre for Policy Studies.
The tragedy of 2020 will leave deep scars on our country. Thousands of families across the UK have lost loved ones. Hundreds of thousands more have lost their livelihoods. And we have all lost our most basic freedoms.
There are, thankfully, tentative signs that we may have reached the virus’s peak. So thoughts must turn towards the way ahead and what the cost of the outbreak will mean for us in the future – not least in terms of the scale of the repair work needed and what it means for the public finances.
Last week, the Office for Budget Responsibility published figures which showed that this crisis will result in the largest fiscal shock Britain has faced since the Second World War. Yet remarkably, our research at the Centre for Policy Studies shows that the costs to Government may be even larger than those estimates indicated.
Over recent weeks, our research team has been developing a ‘costs of coronavirus’ counter, designed to combine the Government’s ongoing announcements with the latest data and modelling on uptake of its schemes, in order to give a detailed picture of the direct financial impact of the crisis.
These figures, published today, put the cost of the Government bailout package at more than £127 billion – based on the OBR scenario of a three-month lockdown, with a further three-month period in which some restrictions are partially lifted.
But that is only the start. There are also the indirect costs to Government from such a sharp economic downturn, such as lost tax revenue – which amount, according to our estimates, to a further £119 billion.
Add in the £55 billion in borrowing that was already pencilled in and you are up to a deficit this year of almost exactly £300 billion – the equivalent of double the amount the state spends on healthcare across the UK, or a terrifying 15 per cent of GDP.
It should be stressed that these figures are still highly provisional. There are so many moving parts to account for in an unprecedented global crisis like this, with new pots of funding and scheme terms changing on a near daily basis.
Just yesterday, the Chancellor announced a £1.25 billion rescue package for start-ups, which we have had to leave out of our calculations because it is unclear how much will be grants and how much will be loans.
Indeed, although it may seem like an eternity that we have been imprisoned in our homes, we are only just approaching the end of the first month of lockdown. This means there are no official statistical returns yet that can give us a firm picture of how this crisis is affecting different parts of the economy.
We freely accept that we may well have double-counted some costs, while others could have been missed entirely under the tidal wave of press releases flowing from every department and quango. In other words, the final bill to Government may change drastically, for better or for worse.
We know now that the furlough scheme will include new starters in the first weeks of March, and run until June – but we have no idea how many people will be able to get back to work as the lockdown orders are lifted.
Likewise the cost of the Government’s Coronavirus Business Interruption Loan Scheme will ultimately depend very heavily on the default rate among the businesses taking up the loans. And of course the longer the economy remains locked in permafrost, the higher the indirect costs to Government in terms of higher welfare bills and lower tax revenues.
So why have we attempted this exercise, given that we are faced with such a moving target?
Certainly not to criticise the Government’s response: it is clear to everyone that extraordinary times require extraordinary measures, and that the costs of not protecting jobs and businesses through the lockdown would be far greater in the long term, due to the economic scarring that would result.
We believe that counting the cost of the decisions being made now, and tracking them as lockdown continues, is vital to informing future policy decisions to take us out of the crisis and into recovery.
As in 2008, the line between survival and disaster will rest on the bond markets’ trust in the British Government and on the reputation of the Bank of England. That requires the Government to be honest both with the markets and with the public about scale of the challenge and sacrifices ahead.
It would be too easy to take the Government’s benign financing position of recent years for granted. Trust wavered in 2009 when we saw the last failed gilt auction and institutional investors warned each other away from UK Government securities well into 2010. While this remains a remote possibility at the moment, if confidence wanes, the cost of financing our debt will soar.
It was the Coalition Government’s resolve and clear determination to bring spending and borrowing under control after the collapse in tax receipts after the financial crisis that steadied relationships with creditors and allowed Britain to engage in consistent, affordable borrowing throughout the decade.
Nor have the Debt Management Office been idle in the last ten years, busily leveraging every ounce of their expertise and creativity to maintain a smoothly functioning market and the constant participation of investors.
If Britain’s borrowing costs start to rise, then greater hardship will await the UK in the form of deeper cuts, higher taxes and ultimately slower growth, as the increasing cost of financing the debt burden eats further into the budget.
The decision to lift the lockdown or ease some restrictions must be based on the latest scientific evidence. Nothing would be more disastrous than rushing to reopen the economy too soon only to have to close it down again if cases spike weeks later. This would be far worse in terms of the human cost – and in economic uncertainty for businesses.
Over the coming months, there will be a ferocious debate about how we pay for the Coronavirus crisis – whether via borrowing, tax rises, or spending cuts, or a combination of all three.
We at the Centre for Policy Studies would argue strongly that the only long-term escape route for Britain’s economy is to galvanise growth by supporting business and enterprise, rather than crushing a recovery with tax rises on wealth creation.
But for that debate to take place, we need to know the facts. It is only by keeping a clear ongoing picture of all the costs, however breath-taking, that policymakers will be able to work out how to take the country off life-support and into recovery.