In just over a fortnight, Rishi Sunak will deliver his second UK Budget. You’ll recall that last March, with the public health crisis spiralling out of control, his Budget forecasts were consigned to the dustbin before he had even arrived at the House of Commons to give his statement. A targeted package of investment suddenly became a £30 billion emergency fund for the NHS and the economy.
Fast forward and the Chancellor is now on track to borrow over £400 billion in 2020/21, an amount no one would have thought possible 12 months ago. Net debt – the total amount of money owed by the Government – is over £2 trillion and, according to the Institute for Fiscal Studies, will soon peak at 110% of UK GDP.
Whilst there are signs that 2021 will be a year of recovery, with the Bank of England striking a more upbeat tone, a legacy of the crisis will be an overhang of government debt. According to some, the Chancellor has maxed out his credit card and a day of reckoning is near. But this is wrong. And it would be a mistake for the Chancellor to be overly concerned about such numbers at this stage.
Firstly, rebuilding our economy needs to take precedent within any debate about the public finances. Ultimately, restoring growth will help see these deficit figures fall quickly.
Secondly, the full cost of this crisis has yet to be realised, although the inequalities it has exposed are now becoming clearer. Last week’s news that adults with a learning disability are three times more likely to die from Covid-19 than the Scottish average was just one visible illustration of the need to do more to support the most vulnerable in our society both now and in the future. This might be costly, but not tackling these inequalities carries a cost too.
Finally, whilst the amount of money the Government is borrowing might be high, the costs of servicing it remains low. Indeed, over the next five years, the Government is set to spend less on debt servicing costs than it was forecast to do prior to the crisis. Now of course this could change, but in the near term the Chancellor has room to prioritise investing in the economy.
The biggest challenge facing the Chancellor will be when (and how) to unwind his various support policies – including the furlough scheme – at the right time. Lift support too early and viable businesses will go to the wall. Keep the support on for too long and he risks stalling the recovery.
Back in the autumn, the Chancellor announced a new job support scheme to incentivise businesses to return furloughed staff to work. This was quickly scrapped as the second wave hit. But similar, and more expansive, transitional programmes will be needed. New measures to help the private sector manage its own debt mountain will be required too, whilst sectors, such as our beleaguered tourism industry, will require further targeted support.
The Chancellor’s decisions are likely to have implications for Scottish Government funding. Last month’s Scottish Budget was another impressive performance by Kate Forbes, particularly given the reality of the economic crisis presented to her. With an election approaching, if more money does flow to the Scottish budget, the Government – and opposition parties – will need to avoid the temptation for short-term headline-grabbing announcements and instead focus on the long term.
It is easy to criticise politicians – indeed it’s probably our national sport! But it is not hard to appreciate the tough job that they – and those advising them – face in steering us through a crisis such as this. Whatever your politics, we should wish both governments well as they start to plan for what we all hope will be the rebuilding of our economy.
Graeme Roy is director of the University of Strathclyde’s Fraser of Allander Institute