Coronavirus: How much will it cost the UK and how will we pay?

Coronavirus: How much will it cost the UK and how will we pay?

With much of the UK under lockdown, many shops, pubs and restaurants are shut, and large parts of the economy are effectively closed.

The government has spent hundreds of billions on measures to support businesses and jobs, and fight the pandemic. But how will it pay for these?

We won’t know how big the final bill will be until after the crisis is over. But the government will certainly have to borrow enormous amounts of money because it is spending more than it is taking in from tax.

Back in July, the Office for Budget Responsibility (OBR), which keeps tabs on government spending, estimated that borrowing would be £372bn for the current financial year (April 2020 to April 2021).

And since then, most of the UK has seen new lockdown measures.

So when the OBR publishes its next set of economic forecasts on Wednesday, they are likely to show that the UK will have to borrow even more than £372bn.

To put that into context: before the crisis, the government was expecting to borrow about £55bn for the whole financial year.

The most expensive part of the fight against the pandemic is the furlough scheme, where the government pays most of the wages of employees who cannot work.

That was expected to cost £52bn up to 31 October – it has now been extended to the end of March, costing billions more.

There are also schemes to help self-employed workers, grants and loans for stricken businesses, and extra money for the NHS.

The government will also raise less tax than it hoped because of the crisis. Unemployed or furloughed workers pay less income tax, businesses pay less tax if their profits are lower, and shoppers pay less VAT if they buy fewer things.

Even if the pandemic ends quickly, the government will have to borrow more money in future years too.

At first the government will raise money by borrowing from investors.

They could be individuals, companies, pension funds, or foreign governments who lend the money to the UK government by buying bonds.

A bond is a promise to pay the money back in the future, and pay interest on the loan in the meantime.

The Bank of England is buying huge amounts of bonds, which will make raising the money easier.

This year the Bank is buying £450bn worth of bonds to support the economy by encouraging more spending and investment, in a process called “quantitative easing”.

In recent years, the government has been able to borrow easily at very low interest rates, which makes that debt more affordable.

There is a limit to how much the government can borrow, before interest payments become so great it can’t afford them. No-one knows quite where that limit is.

At the moment, the government can borrow very cheaply – it pays just 0.32% interest to borrow for ten years.

But those interest payments will still weigh on future generations until the debt is paid off, and will mean there is less money available to spend on public services, or tax cuts.

This gap between spending and tax income – known as the deficit – leaves the government with a choice:

In the end, it may well do a mixture of the three – but those decisions haven’t been taken yet.

Some economists argue that all the costs of the crisis could be easily covered by borrowing alone, but many disagree.

Raising taxes would be politically awkward, because the Conservative 2019 manifesto promised not to raise the three biggest taxes. These are income tax, national insurance and VAT – which together bring in more than half of government revenue.

Increasing taxes means people have less money to spend, which would slow the economy down. However, the respected Institute for Fiscal Studies think-tank has warned that tax rises of more than £40bn a year are “all but inevitable”.

Cutting spending will also be difficult. There have been big cuts over the past decade, and many of the easy savings have already been made.

Some areas have long been protected, such as healthcare – and it would be difficult to reduce health spending after a big pandemic.

In Wednesday’s Spending Review the chancellor, Rishi Sunak, will announce more detail about the future of government spending.

State pensions, another big spending item, are protected by a system called the “triple lock”, which guarantees they rise with wages, prices, and at least a 2.5% increase every year. The manifesto promised to keep this, too.

The chancellor could say the pandemic makes these pledges impossible to keep. But difficult choices will certainly have to be made.

If taxes go up, people will soon realise they have less money to spend.

Likewise, people would notice if lower public spending resulted in worse public services, such as longer waiting times in hospitals or fewer police on the streets.

And if teachers or other public sector workers have their wages frozen, or people on benefits see them rise more slowly, that will be felt very keenly by those affected.

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