Exceptional times have brought exceptional measures, which carry with them exceptional costs. The midst of a pandemic, however, is no time for Britain’s government to worry about a spiralling deficit. There is no sign of a debt crisis and little prospect of bond vigilantes singling out the UK while all major governments are running unprecedented deficits. In fact, the cost of borrowing has fallen further during this crisis.
The temporary activation, should it be needed, of the “ways and means” borrowing facility — the government’s overdraft at the Bank of England — further blunts the bond market’s claws. The greater risk is an unnecessary and early shift to austerity that chokes off the prospect of an economic recovery.
Concerns about the scale of borrowing are understandable. The figures involved are enormous — the Office for Budget Responsibility, the fiscal watchdog, estimates the deficit this year will hit £273bn. Official statistics on Wednesday showed the British economy is shrinking at the fastest rate on record; in March alone, output fell 5.8 per cent, the biggest monthly drop since 1997. Modest attempts to restart the economy — limited to manufacturing and construction — are unlikely to halt the drop in tax revenues.
At the same time the government has more obligations than ever: around a fifth of workers, currently furloughed by their employers, are being paid through the government’s job retention scheme. This is in addition to the ordinary public sector wage bill, the increasing ranks of those claiming unemployment support, and the extra funding made available for the health service to fight the pandemic directly. On Tuesday, Rishi Sunak, the chancellor, was right to extend the furlough scheme to October, albeit with less subsidy and more encouragement for workers to go part-time.
Yet any discussion of raising income taxes even while the government is paying workers’ wages is premature. Thousands of businesses have no revenues, let alone profits on which to be taxed. The long-term sustainability of public finances is better served by encouraging economic activity to resume and avoiding the sort of consumer and government retrenchment that will prolong the recession.
Eventually, tax rises will be needed in the UK, as they were even before coronavirus hit. Not only will government carry much more debt thanks to the extra spending brought on by the crisis and the collapse in tax revenues. Mr Sunak will also need to find the funding for stretched public services and an ageing society. Damage done to the social care system by cuts to local authority funding over the past decade has been on clear display. Public appetite for further spending cuts is limited, especially ones that affect those who have been on the front line fighting the pandemic.
The need for higher taxes, however, is a medium-term concern. For now, the government should put aside worries over the level of debt and continue to provide the support the economy needs. Britain’s economic response to the crisis — the co-ordination between the Bank of England and the Treasury, the rapid development of the job retention scheme — compares favourably to its often clumsy handling of the virus lockdown. A premature end to accommodative policy would be a waste of that good work.
Low interest rates appear to be here to stay. That means governments can live with higher levels of debt than was previously thought — even if it does not mean they can neglect the need for prudence altogether. Timing is everything. Raising taxes during the worst recession for three centuries would be a historic mistake.
