The Government will spend £337 billion to get through Covid-19, but it needs to recoup this cash somehow
The impact of the coronavirus outbreak will leave a £337 billion hole in Government coffers.
The Government is spending more on health services, income support for those unable to work, social care funding, supporting businesses, repatriating British people stuck overseas and housing rough sleepers, among other causes.
To put £337 billion into context, that is more than £5,100 for every man, woman and child living in the UK.
And this figure could rise even higher, according to a National Audit Office report, which says: “The costs of the Government’s response are large and uncertain and will depend on the continuing health and economic impacts of the pandemic.”
That £337 billion is also just a small part of total government debt, which could top £2 trillion by the end of the year, according to a House of Commons document in April. That would be around £30,300 for each person in the UK.
This money needs to be repaid. The big questions for individuals are: will it affect households, and if so, how?
The Government is yet to announce any plans on how it will settle its coronavirus debts, and experts think it may not do so until later this year in the Budget.
But its two big options are raising taxes and cutting public spending – or both.
It could also turn to other innovative options to raise cash, and it may combine any of these tactics with controlling inflation to erode the value of the money it owes.
Tax is almost certain to rise as a result, but which taxes might the Government increase? The biggest earners are income tax, national insurance and VAT. Together, these raise around two-thirds of government revenue, according to the Institute for Fiscal Studies.
Changes to these would seem like an obvious choice to foot the bill, but the Prime Minister has ruled them out — at least for now.
One of the Conservatives’ manifesto pledges in the 2019 election was not to raise any of the three taxes for five years and, as recently as last month, Prime Minister Boris Johnson loosely committed to keeping all the party’s election promises.
Raising inheritance tax
Other areas of taxation could be increased instead, such as inheritance tax (IHT), though this would be fiercely opposed by the public.
The Government’s coronavirus bill is second only to the cost of rebuilding the country after the Second World War when inheritance tax was as high as 80% in response.
One way the Government could increase IHT haul is to reduce the loopholes to paying it. For example, owners of rural land and business premises can pay as little as 0% IHT through business property relief and agricultural property relief.
Law firm Irwin Mitchell says these tax breaks could now be cut to help pay for the coronavirus bill.
Kelly Greig, partner at the firm, says the Government has considered scrapping these two reliefs before and she “wouldn’t be surprised to see this 100% relief reduced substantially, perhaps to 50%”.
Pensions tax relief would also be an easy target, and reform is regularly mooted when the Government needs to boost its coffers.
Alternatively, it could also choose to set up a new tax or levy rather than alter existing ones. A one-time wealth tax on higher taxpayers has been suggested by think tank Tax Research UK.
But one problem with relying too heavily on taxation to pay the coronavirus bill is that the number of taxpayers available will fall. One in 10 workers could be unemployed by the end of June, according to the Budget for Office Responsibility.
So the Government will have to consider other options such as cutting public spending.
However, many of the obvious places to make these savings have already been exhausted in the 10 years of austerity that followed the 2007/8 financial crisis.
Not only that, but the British people have grown tired of austerity and may object to it being brought back.
Cynthia Chan, group credit officer, global financial institutions and sovereigns at credit rating agency Fitch Ratings, says: “The impact will depend on how each government decides to manage its public finances. There are various options if a government wants to rein in deficits and lower debt, but governments will have to balance political considerations, such as whether there’s austerity fatigue.”
Triple lock reform
Pundits have suggested several other ways the Government could cut its spending, chiefly reforming the state pension triple lock. The triple lock is a legal guarantee that the state pension will rise in line with the highest of average earnings growth, inflation or 2.5%. It was introduced in 2011 to ensure the average pensioner household income increased each year regardless of their economic circumstances.
Both the Treasury and the Social Market Foundation (SMF) think tank have suggested the Government could water down this retirement guarantee.
The Treasury estimates savings of up to £8 billion a year could be achieved by doing so, while the SMF puts the figure at £20 billion over five years.
But the Prime Minister made a manifesto pledge to protect the triple lock and has recently promised to honour it.
A possible tactic that could be combined with any of these options to lower the value of the £337 billion debt is ‘financial repression’.
This relies on the fact inflation erodes the value of money, which includes debts. If the Government can cause inflation to rise, but keeps interest rates low, the amount it repays in real terms will fall.
There are two problems with this. First, it hammers savers, who will find it hard to make decent returns on their cash.
Second, one of the main ways the Government can do this is by lowering the Bank of England base rate, but this is already at its lowest point in history, at 0.1%.
Andrew Bailey, governor of The Bank of England, has refused to rule out cutting interest rates to below zero.
Negative interest rates would be terrible for savers. They would effectively have to pay their savings provider to hold their cash, provided their bank chose to pass on the sub-zero interest rate.
But it would be a great time to be a homeowner or take out a loan, as these would be much cheaper than normal.
Another option is for the Government to make no cuts at all and instead invest in the country to encourage economic growth and pay off its debts that way. By investing in measures to boost the real economy, such as infrastructure or green energy, the Government would create jobs, boost tax income and improve the UK’s productivity.
This way, it could earn rather than cut its way out of the debt mountain.
Sadly, many of the options available to pay off the coronavirus debt will have a negative impact on some section of society.
All eyes will be on the Government later this year to ensure that the measures it picks are fair and proportionate.
NS&I to the rescue?
The £337 billion bill could also be eroded by creating a new innovative savings product that the public could take out, a form of ‘coronavirus bond’.
Again, this is an idea that has been deployed in the past. During the First and Second World Wars, the Government issued so-called ‘war bonds’, which worked like savings bonds today.
Savers got a patriotic glow from lending their money to the Government to finance the war effort, but also received returns of up to 5% at the end of a fixed term.
The obvious way to do this would be through National Savings and Investments (NS&I), the state-backed savings institution, whose main role is to raise money for the Treasury.
Many may struggle to see how the cuddly savings provider could raise enough cash to even make a dent in the Government’s coronavirus bill.
But the idea of a coronavirus bond is less far-fetched than it may sound. NS&I is an enormous institution and already holds £150 billion of savers’ cash, making it the single largest savings company in the UK. That £150 billion represents around 10% of all government debt, with the rest being owed by the state to governments and institutional investors.
Rachel Springall, Moneyfacts spokesperson, says: “Fundamentally raising more deposits could aid the economic crisis by providing more spending money to the Government.
“During both the First and Second World War, the National Savings movement was seen as instrumental in raising funds to help the war effort.
“Now, as the country is at war with the coronavirus pandemic, the funds that NS&I could raise from savers may prove to be a vital injection.”
In fact, NS&I may already be on a secret cash-generating mission. The government-backed savings institution rarely pays savers top rates because it sets interest on its savings deals to be competitive but not the best available, to avoid putting banks out of business.
However, NS&I currently tops the best buy tables with several deals, while other providers cut their rates over and over again. NS&I’s Income Bonds are currently the best easy-access savings product, paying 1.16%.
In the past, NS&I would quickly change any of its deals that accidentally became best buys to avoid aggravating banks. Tellingly, it has not done this now.
It would not comment on the longevity of its now market-leading rates, which will conveniently be the top pick for any saver wanting to hoard their cash.