Slow Pace Of Economic Recovery To Put Extra Debt Burden On British Exchequer

Summary

• Government borrowings to touch £300 billion for 2020, amidst falling revenue
• British economy would take several years to fully recover from the pandemic impact – Institute of Fiscal Studies/Citibank report

The pace at which the UK economy is picking up requires the exchequer to extend stimulus longer than anticipated. The opening up of the economy in the first half of May this year has not been accepted by the people very enthusiastically, and the consumer sentiments are still low, so to say. A rising rate of coronavirus infection in the country, despite continuing with social distancing measures has meant that many people are still hesitant to come out. Thus the earlier estimates of the UK government which said that the stimulus packages would be required till August or September this year may be misplaced and may very well have to be extended till the end of 2020.

Despite the efforts being made by the NHS (National Health Service) and the British government, the tempo of growth of corona pandemic continues to remain unabated. 304,331 people had been infected by the virus in the country, out of which 42,632 had already succumbed to it by June 21 this year.

The longer it will take for the economy to come back to pre-corona levels, the prolonged will have to be the period of the government stimulus measures. When these measures were first announced in March 2020, it was estimated that the furloughing scheme, in particular, would need to be in place till the lockdown persists. But later it was extended after due deliberation that it may not be feasible for businesses in the country to recoup from the lockdown as fast as it was being anticipated. After the lifting of the lockdown, some industries like construction and retail did make a rebound, but their activity levels are nowhere near their last year levels, for the same period. According to OECD (Organisation for Economic Cooperation and Development) estimates, the British economy will shrink by 11.5 per cent this year, despite all the stimulus measures rolled out by the government.

Another worrisome factor that will have a strong bearing on the Exchequer burden is the increase in the unemployment levels in the country. Despite the widespread placement of employees by businesses in the country under the Government’s furlough program, millions of people are still expected to lose their jobs. The more the numbers of job losses, the greater will be the number of people signing up for unemployment, which will put additional burden on the exchequer. Three industries, in particular, are at maximum risk and are set to lay off more staff. First, the airlines sector, which is still seeing many of its aero planes stranded at airports with government permission still awaited for regular operations. Second, the hospitality industry which is marred by the strict two-meter social distancing measure in place, plus a general fear factor among people to avoid places where they might contact the virus. The third most battered industry is retail, which has been witnessing very low footfalls since the first phase of the reopening. These three sectors are likely to see slower recovery than the rest of the economy.

A joint report published on June 19 by Institute of Fiscal Studies and Citi Bank has estimated that it would take ‘several years’ for the economy to recover from the pandemic, and a sharp turnaround is not expected. The joint report projects a UK budget deficit of 130 billion pounds by the year 2024. This is almost twice the size of OBR estimates made in March this year. It is also worth noting that the United Kingdom is expected to roll out £132.5 billion in 2020 towards emergency spending and corporate tax cuts to the businesses in the country to fight the pandemic menace which will be putting extra burden on the Exchequer.

The public debt burden on the British Exchequer has been mounting since the pandemic began. It is estimated that by the end of this year the accumulated public debt in the boos of the government would be about £300 billion. Last time the country got into an adversity of this magnitude was in 2008 during the financial crisis. The government had to then initiate an austerity drive to retire off the debt over the years. This time around, however, the entire economy has come to a grinding halt. The government support for industries, jobs, and livelihoods are accentuated, and it is not in a position to initiate an austerity drive, as of now. Experts at the Institute of Fiscal Studies, are of the view that as long as the economy does not reach a level of stability, the government has to keep spending even at the cost of mounting public debt. But once that level has been achieved, the government will have to take hard decisions to retire it off.

The Boris Johnson government, however, is not willing to walk the same path as the Labour Party government took to reduce the debt in 2008. Rishi Sunak, the Chancellor of the exchequer, has time and again reiterated that his party will not adopt an austerity strategy this time and would rather spend more for higher growth and get higher tax revenue to earn its way out of the pile of UK public debt. The party had come to power with the poll plank that it will spend more and propel the economy on a higher growth path in order to create more jobs and keep the country internationally competitive.

The coronavirus pandemic has made the task set out by the Tory government even more challenging for itself. It will be interesting to see how it is able to walk the tight rope in the coming months to pull the economy out of the pandemic induced recession and follow an expansionary strategy at the same time.