A leaked Treasury document about the cost of the lockdown to the British taxpayer has provoked a lively debate about what should be done.
One estimate puts the cost of the pandemic this year at £300bn. As a consequence, a base case scenario says that will leave us with a deficit of £337bn with a need for £30bn in tax rises and spending cuts. A worst-case scenario shows a deficit of £516bn with a need for up to £90bn of tax rises and cuts.
The document then discusses the options of increases in income tax, VAT, national insurance contributions and corporation tax. Explosive stuff for a Tory government that pledged to increase none of these in last December’s General Election.
Another unpalatable option for the government is to end the triple lock on pensions, the protection against inflation for the elderly. £8bn could be saved this way. Despite being 71, I believe this should be done. Younger people have been hammered for too long. Before the virus it was university fees, unaffordable housing, and pressures from social media. Now many have had their final year at school mucked up and have been prisoners in their own home. If they get to university in September, it will only be to get lectures by Zoom.
The document also suggests the return of our old friend, the public sector pay freeze. That will go down well with the people we clap every Thursday night.
There are those who think that the huge debt figures we are mounting up will sort themselves out with the passage of time because borrowing will improve the Gross Domestic Product and lower the debt ratio. They argue that tax rises and spending cuts could worsen the recession and weaken market confidence. They point to the fact that in the USA and here there is no lack of confidence from the buyers of bonds.
WHAT WILL THE GOVERNMENT DO?
It is unlikely that the new Chancellor will want to pursue George Osborne’s austerity route. However, such is the power of Treasury orthodox thinking, that debt and deficit cannot just be ignored, that we must expect some tax rises eventually. The election is far away and the excuse is writ large…. Covid-19.
It is clear that although the furlough scheme has been extended till October, the 80% subsidy is not long for this world. Before the summer is out expect the squeeze to start on employers to pay more. That is when redundancies could really take off, particularly in the hospitality industry.
I continue to fear for the northern investment projects we have been promised, but I must acknowledge that the Chancellor hinted this week that the “levelling up” project was still on.
Meanwhile our awful death toll continues to mount. The government’s defence of its policy of sending untested elderly people from hospitals to care homes is unconvincing.
The loosening up of the shutdown is a welcome recognition that recession can kill as well as Covid-19.
How the government handle the next few weeks could define the Johnson premiership.