Charting the course back to black

Around the world, the coronavirus pandemic has forced governments to put their economies in deep freeze. In the UK, the Bank of England estimate that as a result of the measures taken, GDP will shrink by 14%. In April, the OBR forecast borrowing this year would be up £218 billion. Public Sector Net Debt at the end of the year will be 95% of GDP. This was before the furlough scheme was extended by five months.

Both analyses are predicated on a v-shaped recovery, which many believe to be optimistic, particularly with the Prime Minister’s pledge to proceed with “maximum caution” in lifting lockdown measures. The fiscal rules have, rightly at a time of crisis, been thrown out the window, but at some point, the Government will have to decide what to do about the public finances.

Boris Johnson has ruled out spending cuts as a route to balancing the books. Tax increases have not been similarly rejected. We are already hearing calls for targeted tax increases not just as a way of raising much needed revenue, but also resetting the social contract and reducing inequality. Yet any such action is likely to face tough opposition from the Government’s own backbenches.

With nations across the developed world in similar financial positions, the Government has some time to chart its course. But while debt will be cheap to service in the short-term, if interest rates rise that will not remain the case, and those tough decisions will have to be taken. At the same time, the Chancellor will have to balance the potentially competing goals of putting the public finances back on track while simultaneously stimulating a fragile economy.

This event explored the short-term impact of the virus on the public finances, and the options available to the Government over the medium term.

Panel:

• Paul Johnson, Director of the Institute for Fiscal Studies
• Lord Macpherson, Permanent Secretary to the Treasury from 2005-2016
• Polly Mackenzie, Director of Demos, and Director of Policy to the Deputy Prime Minister from 2010-15
• Chair: Charlotte Pickles, Director, Re:State