LONDON — When all this is over, Boris Johnson will face a dilemma.
While the world is currently in fire-fighting mode — and the British prime minister is quite literally battling COVID-19 himself — eventually the long-term impact of the coronavirus pandemic and the economic consequences of mitigating it will have to be addressed.
Johnson — who had hoped to lead the U.K. into the post-Brexit era with increased public spending fueled by higher borrowing — will instead find himself balancing the books after a deep economic shock.
Like his old school foe and predecessor David Cameron, Johnson will be a post-crisis prime minister.
Cameron responded to the aftermath of the financial crisis by cutting spending. Johnson, who vowed during last year’s election to reverse the austerity that has defined Conservative governments since 2010, may have little political room to do the same. An anxious British public have rarely been more grateful for their public servants, especially those working on the frontline of the National Health Service. It would be a brave prime minister who took the knife to public services again.
No-one knows how or when the coronavirus outbreak will end, but one thing is already certain: The economic consequences will be huge.
At the same time, the imperative to balance the books and ensure sound government finances will be greater than ever in a post-pandemic world where the U.K.’s vulnerability to sudden, unexpected economic crises and the need to save for a rainy day will be more obvious than ever.
That could leave just one option, which Conservative prime ministers never like to entertain: raising taxes.
Cost of corona
No-one knows how or when the coronavirus outbreak will end, but one thing is already certain: The economic consequences — as well as the social impact — will be huge.
The big state is back, with the U.K. government committing to pay up to 80 percent of salaries (capped at £2,500 per month) of workers whose employers otherwise could not afford to keep them on. Welfare payments are expected to soar with more than 500,000 new claims on the universal credit benefit made since last week, and the government has, in effect, temporarily nationalized the railways.
Economists at Morgan Stanley estimate the national economy could contract by 5 percent this year. The independent Institute for Fiscal Studies think tank said on Thursday that such an outcome would force government borrowing above £175 billion, more than eight percent of national income and triple what was forecast in Chancellor Rishi Sunak’s budget just two weeks ago.
About 40 percent of that increase would result from the cost of the government’s bailouts, and the rest from the economic downturn hitting revenues and adding to government spending, the IFS said.
Ian Mulheirn, a former Treasury official and chief economist at former Prime Minister Tony Blair’s Institute For Global Change think tank, said governments were effectively facing up to the consequences of — quite rightly — imposing deliberate recessions on their economies.
“The deficit is likely to explode and public debt levels will rise quickly — as they should while we put the economy into deep freeze,” Mulheirn said. “The scale depends on how long the lock-down is needed for and whether there are other outbreaks later in the year.”
“But this is happening at a moment when we’re all much more aware of the role of the state in stabilizing the macroeconomic situation in the face of shocks that — as we’ve just been reminded — could come from anywhere.”
Far from being able to cut public spending to balance the books, Mulheirn believes the government will come under “intense pressure” to increase spending further.
“This is a world away from what small-state conservatives would have imagined they’d be overseeing in government” — Mike Brewer, deputy chief executive of Resolution Foundation
“Voters are now even more aware of the importance of public services — the NHS, social care, Public Health England and the welfare safety net in particular, but others too: the army handing out food, [and] everyone finding out how hard it is to teach a 7-year-old,” he said.
On top of that, government may find it difficult, having introduced additional welfare spending as an emergency measure, to take that cash away from some of the country’s poorest people when the crisis is over. Increasing the main unemployment benefit by £20 a week to help people through the crisis, for example, had “unwound decades of successive cuts to its value,” said Mike Brewer, deputy chief executive of the Resolution Foundation think tank.
“It may not be so easy to return its value back to a 30-year low next year,” Brewer said. “More broadly, as more many people experience the U.K.’s social security safety net, often for the first time ever, it could prompt a wider attitudinal shift towards making the system more generous, and tailored to fit the needs of people who often find themselves receiving it in tough circumstances.”
The twin pressures — delivering on promises of improved public services without borrowing so much that the government has no fiscal firepower left for the next crisis — lead Mulheirn and Brewer to conclude that higher taxes will be the only lever government has left to pull.
Sunak has already hinted at tax rises on the self-employed (a totemic issue that former Chancellor Philip Hammond tried — unsuccessfully — to grapple with in 2017).
On Thursday, Sunak said that a major package of government support for the self-employed to see them through the crisis made it “harder to sustain the argument” that they should be taxed at a lower rate than employees. More broadly, he said the U.K. faced a future discussion on “how best we all come together … to right the ship and make sure we get everything back on track again.”
According to Brewer, “higher taxes will be needed to service and ultimately reduce our deficit.”
“This is a world away from what small-state conservatives would have imagined they’d be overseeing in government,” he said. “But the coronavirus is likely to have changed a lot of assumptions about how our society and economy operates.”
Robert Colville, director of the Centre for Policy Studies, a co-author of the Conservatives’ 2019 manifesto, agreed that the crisis “will certainly leave us with a smaller economy, higher debt and larger state. In its aftermath, people will surely want more security.”
However, he said a “left-wing fantasy of vastly swollen state and vastly higher taxes would be the best way to crush any recovery at birth.”
“There is a difference between a large state and a robust and competent one,” he said. “Over the years, there’s been a fairly consistent ceiling in terms of the amount of tax the government can extract from the economy — usually significantly below what ministers want to spend.”
He pointed to polling by YouGov for the think tank’s Make Work Pay report, that found people “want the state to spend more, but are deeply reluctant for that to come out of their own pockets — especially when they’re feeling the pinch, as they surely will be as we emerge from this shock.”
Mulheirn, however, said it was “hard to see the circle being squared without tax rises,” dubbing the coming decade “austerity redux … this time with tax rises rather than spending cuts.”
As for that other overriding goal of the British government which policymakers used to talk about, Mulheirn offered a piece of advice that his boss — the ardently pro-EU Tony Blair — would approve of.
“Given the unpalatable options on the table, the government might want to reconsider the wisdom of the very hard Brexit it was planning, since that will only sharpen the dilemma,” he said.
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