Duncan Simpson is Research Director at the Taxpayers Alliance.
Two recent reports from the public accounts committee should give politicians plenty of food for thought over recess. The first looks at the expenditures associated with Covid-19 (whose lifetime costs are now expected to reach £372 billion).
The difference between the outlays already made (such as for the furlough scheme) and those expected to be made in the future can partially be explained by the liabilities that taxpayers might face for commercial loans backed by the Government. The committee was “alarmed to learn” that of the £92 billion worth of loans guaranteed by the HM Treasury, £26 billion might not be paid back.
Separately, the committee has also shed some light on the procurement of personal protective equipment. The committee identified waste levels as being “unacceptably high”, with £2.1 billion worth of items being unsuitable for medical settings. Fast decisions are crucial in a crisis, but bad decisions leave taxpayers shortchanged.
When you put the PAC reports into the wider context of the public finances, things get even more alarming. Public sector national debt stood at £2.2 trillion in May 2021 – or just under 100 per cent of GDP. That’s the highest level it’s been since March 1961.
Quantitative easing – the Bank of England bond-buying programme – has now grown to £0.9 trillion. The House of Lords economic affairs committee recently noted that “no central bank has managed successfully to reverse its asset purchases over the medium to long-term, and the key issue as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets that spills over into the real economy.” If we weren’t into the unknown before Covid-19, we very much are now.
There is some reasonably good news on the debt stock, however. The UK’s gilts are much longer-dated than many other advanced economies: just shy of 60 per cent of those in issue (excluding index-linked bonds) don’t mature for at least another seven years. This means that the Government is relatively unaffected by short-term interest rate increases. And since advanced economies’ central banks have not indicated any sharp ratcheting up of rates, this could well provide (some) welcome respite.
Inflation, however, could throw a spanner in the works. The main measure of inflation – CPIH – was last this high in February 2018. If this trend continues, higher general prices could well force the Bank of England into tighter monetary policy. This will make both debt servicing and government spending plans harder still.
But the big policy debates leave even more dark clouds on the horizon. Much of Westminster seems hell bent on pursuing net zero without considering the costs. What this will likely entail is a whacking up of families’ outgoings.
For instance, one potential plan to prohibit the sale of gas boilers – thereby eventually forcing most households to switch to heat pump alternatives – could cost between £6,000 and £18,000 apiece. A standard gas boiler retails for around £2,000. The well-heeled don’t seem to appreciate the everyday pressures on their finances that most households face.
Equally, banning the sale of petrol and diesel cars by 2030 could cost families dear. The market for electric vehicles will of course grow and the costs come down as new models and competitors enter the market.
Likewise, many US car manufacturers have seen the writing on the wall and have all but stopped research and development into new internal combustion engines. But again, the thought of coughing up for a new motor will rightly worry millions of Britons. After all, 61 per cent of journeys were still undertaken by car in England during 2019.
Levelling up too presents risks to taxpayers. Though still quite ill-defined (something to do with being near a football pitch, I think), plans to increase investment spending are eye-popping.
Forecasts from the Office for Budget Responsibility show that public sector net investment will reach £70 billion by the end of this parliament. In real terms, it will have increased by two thirds in ten years. Relative to the size of the economy, that is the same as the heady, free market paradise that was Jim Callaghan’s administration or the final year of Clement Attlee’s.
When you mix together Covid spending, a large and growing debt stock, quantitative easing, potential inflation risks and enormous spending commitments, the Government’s future choices risk putting taxpayers onto an even more unsustainable footing than they currently are on.
And politics is all about choices. Some of them are difficult, but taking the easy route – spending lots of money you don’t have – can vanquish a reputation for economic competence.
So the Government must be upfront about the trade-offs in its policy programme. It should also be responsible. Perhaps it’s an excellent idea to embark on an infrastructure spending programme; but we need to hear more about where the Government will save money to pay for it, instead of endlessly raiding taxpayers’ pockets for more cash when the tax burden is already at a 70-year high.
The Comprehensive Spending Review in November gives the government a chance to do exactly that.