The Exchequer May Need £300 Billion In Debt to Bridge the Pandemic Induced Deficit: OBR

The British exchequer is leaving no stone unturned to make sure that the adverse impact of the pandemic on the country’s economy is minimised to the maximum possible extent. Towards this direction, it has brought about massive stimulus packages and is also engaging in enormous benefit transfers to people who are expected to be most affected by this pandemic. In the fulfilment of this objective billions of pounds have been spent, and more is envisaged. The result of this effort is that the government will have to take a vast amount of debt which will be very difficult for it to retire from its books in the short term. The Office of Budget Responsibility (OBR) has come out with a report stating that the government would need another £300 billion in debts to bridge the gap between its expenditure and earnings if it wants to fulfil its objectives set out to help the economy out of the pandemic crisis. The borrowed amount as per the OBR’s assessment would be nearly 15 per cent of the country’s national income and is much higher than the debt raised by the government during the 2008 financial crisis. Chancellor Rishi Sunak day had recently stated that the British economy is already in a recession, even before the official definition of two consecutive quarters of contraction comes true, yet the chancellor reiterated his confidence that the measure taken by the government will help the country make a quick turnaround when the dust settles on the pandemic. The United Kingdom till now is the third most impacted country by the pandemic with at least 233,000 infected so far out of which at least 33,000 have already lost their lives.

The government-imposed lockdown is the foremost contributing factor in the current tryst of the British economy with the pandemic. The government-imposed lockdown has impacted the small and the medium-sized businesses the most, who are dependent on their cash registers for their survival. Small and medium-sized companies are the lifeline of any country; they are not only the largest employers in the country but also often employ people who are unskilled or semi-skilled. The British government, in order to protect the jobs of scores of employees, came out with a massive furloughing scheme so that these businesses do not lay off their employees which would have resulted in a massive unemployment crisis in the country. The scheme that was announced by the government in the first half of March, when the pandemic was beginning to make its presence felt in the country, entailed that the government would pay 80 per cent of the salaries of the retained employees of these businesses up to a maximum of £2,500 per month per employee. Till the beginning of May, more than 3 million people had already been put under the benefit of this scheme with the government had announced of extending till up to October this year, considering a lot many businesses may not be in a position to take full charge of their employees if the government were to withdraw it as soon as the lockdown was relaxed.

It could very well become imperative for the government to offer extensions to its stimulus schemes, given the way the situation is evolving around the pandemic. The country’s Debt Management Office (DMO) has been very busy lately issuing bonds, on Tuesday 12^th of this month the office raised £12 billion issuing ten-year bonds and another £2.5 billion selling twenty-year bond on May 14, 2020. The DMO has stated that they are witnessing a very good appetite for the government bonds and many more billions could come to the government’s coffers in the next few days.

Despite the heavy debt burden taken in by the government, it does not seem to be in a mood to repeat the austerity drive launched by the then government in 2010 when the subprime crisis and sovereign debt crisis had hit the country. The government this time is of the opinion that lowering spending will only lead to lower growth, resulting in a weakening of the government’s ability to repay its debts. Instead, it is willing to spend more so that growth is spurred, and the debts are paid back with the incremental revenues that come into its coffers. It is very important that the government be very careful at this point in time that none of the good work done by it so far to protect the country from the pandemic goes waste. Cutting down support in the furloughing scheme now or the bounce back loan scheme immediately will certainly result in many businesses going bust and millions of people going unemployed. There are already more than two million people who have registered with the government for unemployment benefits, should a sizable portion of the now furloughed people also join the list, the problem will become very big for the government. Instead, the government would do well now, to see how it can reduce its cost of borrowing if it has to extend a free or almost free stimulus package to the economy.

The government has this week initiated the process to slowly relax the lockdown conditions in the country. It has issued guidelines for factories and other places of work on how people might perform their duties while maintaining social distancing protocols and being safe. The government has a three-phased plan whereby it intends to open up the economy steadily over a period of next few months. The government has, however, still cautioned that the plan is conditional, based on the spike in the rate of infections from the current pandemic due to novel coronavirus, and a reversal in the relations could very well happen if a sudden spike in the number of cases is found at any stage. The government understands that it is very important that the lockdown is removed as soon as possible if the recession has to be checked before it goes any deeper.

The government’s intention to keep up it’s spending despite the increasing burden of debt could very well lead to a rise in inflationary conditions in the country, where people have ample money with them thanks to the generous schemes of the government, but the production capacity weakened. That situation though, would be beneficial to encourage production to come up fast in the short run but could damage the economy if elongated for a more than a reasonable period of time.