How much will this pandemic cost us? And how will we pay? The mounting cost of Britain’s coronavirus response is astounding. The furlough scheme alone could cost an estimated £80bn; overall, the package will result in a deficit of nearly £300bn in the current financial year, up from £55bn in March’s budget, the Office for Budget Responsibility forecast on Thursday.
Yet Britain looks entirely unremarkable in the global context; in fact, the Institute for Fiscal Studies says the response of other G7 nations has typically been larger. The International Monetary Fund expects average debt-to-GDP ratios to be above 120% in advanced economies next year, above the levels seen in the 2008/9 financial crisis, as support packages and plummeting tax income take their toll.
Britain is being sensible, not spendthrift. In the short term, the Bank of England is footing the bill; in the medium term, unlike some nations, it is trusted to pay its debts. What happens in the longer term? The former chancellor George Osborne had already predicted that coronavirus spending would prompt the government to turn the page back to his austerity strategy. This week’s leaked Treasury report on options for funding the package – including a two-year public sector wage freeze – has raised suspicion of future cuts and invigorated debt hawks.
Such an approach would be disastrous. Austerity choked off growth following the financial crisis, delaying and weakening the recovery. And its true costs went deeper. Punitive cuts reduced the capacity of the NHS and social care to cope with shocks, and even the stockpiles of PPE. It damaged public health and increased inequality, leaving communities more vulnerable.
The spectre of a renewed round might well prompt voters who lent Boris Johnson their votes to snatch them back, as the prime minister surely knows. Last year’s election and this spring’s budget demonstrated that the government understood the mood had changed: the public had lost its tolerance for more state-shrinking. Electors didn’t put their weight behind Mr Johnson so that he could hammer public services. That shift has surely been intensified by the current crisis. A pay freeze for essential workers sounds obscene at this of all times. Commerzbank warned that additional fiscal austerity would make matters worse for the British economy. Jim O’Neill, a junior Treasury minister under Mr Osborne and former Goldman Sachs chief economist, argued on Thursday that the government should consider converting loans into long-term equity support, which might help it reach structural goals such as a greener economy.
But while the terms of public debate have shifted, the Tory right has not, and Mr Johnson may yet need them again. Their familiar argument is that any responsible individual can only spend what they have; and that governments must do likewise. This apparently common-sense observation is in reality entirely misleading. The state is the last remaining pillar of the economy when households and businesses cannot or will not spend. If it too retrenches, there is no way to check the downwards spiral. If it spends, then others are more able and likely to do so. The government’s cash does not crowd out private spending; it encourages it.
The most cavalier course of action in this case would be to slash public spending. The most responsible would be to take the opportunity to remodel and create a fairer and more sustainable economy. No one doubts that the appetite exists. But for it to be realised, an argument that appears to have been won will need to be made and made again.