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For months, the chancellor has been spending huge sums of money on the COVID crisis.
On Wednesday, we received not only the bill, but an idea of how long and difficult the road back to recovery will be.
From rescue to harsh truths, Rishi Sunak numbers presented to parliament were amazing.
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Public Sector Salary Freeze Announced
the coronavirus The bill was £ 280bn for this year and £ 73bn next (Paul Johnson of the Institute for Fiscal Studies noted that it could be even higher given that the spending review assumes zero spending on COVID after of the next year).
The economy has suffered its biggest contraction, 11.3 percent, in 300 years, while lending is forecast to hit a peacetime record of £ 394 billion this year.
Unemployment is expected to rise to 7.5% in the second quarter of next year. That is 2.6 million people without work.
And if the public health emergency has an end point around Easter, when a mass vaccination program is underway and life can return to some form of normalcy (we hope), the chancellor’s message on Wednesday was that the economic emergency is just beginning. while the long-term scars of COVID-19 they are permanent.
The economy will be 3% lower in 2025 than was expected in the March budget.
The chancellor on Wednesday made it clear that his immediate priority is “to protect people’s lives and livelihoods.”
Even in the midst of an economic crisis, this is not the time for fiscal consolidation. But also a warning from the chancellor that there will come a time when we will have to start repairing public finances.
“This situation is clearly unsustainable in the medium term … we have a responsibility, once the economy recovers, to return to a sustainable fiscal position,” he said.
There was a small taste of things to come when Mr. Sunak announced a wage freeze for public sector workers (although NHS staff and below-average state workers were exempt).
There was a cut in the foreign aid budget, while Sunak also cut the government’s spending plans from 2021 to 2022 onwards by more than £ 10bn a year, compared to plans set out in the March budget.
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Cameron: ‘sorry’ foreign aid cut
But he will not be able to evade the question of how and when he intends to bring public finances to a more sustainable fiscal base for so long.
The country will continue to borrow £ 100bn a year in 2025 and there will be at least a £ 30bn annual hole in government finances by the middle of the decade, according to the Office of Budget Responsibility.
Tax increases and spending cuts seem inevitable, and overwhelming: closing that £ 30bn gap through income tax alone would require a 6p increase in the rate.
It is also inevitable that the medicine needed to start healing our economy, whether it be spending cuts, freezes, or tax increases, all have painful political side effects.
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Economy: ‘We have never seen anything like this’
It is made even more difficult by the promise of the prime minister’s manifesto not to increase income tax, national insurance or VAT during the term of this parliament.
Breaking the electoral promise not to cut the foreign aid budget has sparked a parliamentary backlash. Can you imagine the consequences if the chancellor decides that fiscal promises must also be broken?
There will be those parliamentarians who believe that the country can come out of the crisis (although the economic rebound will have to be spectacular for that) through stimulus and low taxes and another field that believes that taxes will have to rise.
Managing the economic consequences of the COVID crisis was quite difficult; managing recovery will perhaps be even more difficult.
