Expensive, yet necessary: the British government’s fiscal response to COVID-19

The COVID-19 pandemic is first of all a health crisis, and governments are right in taking drastic measures to support the overburdened healthcare system. Taking care of the vulnerable should and is a priority, but unfortunately it is not the only public concern. As we fight to save lives, our livelihoods and economies are in danger. The economic crisis triggered by COVID-19 is unique since it impacts both the supply and demand sides of the economy; many goods and services are being neither produced nor consumed due to lockdowns, international and internal travel restrictions, and fear in face of uncertainty. Experts warn that the world might be heading not only towards a recession, but even a depression.

Comprehensive government policies can influence the economy and mitigate the crisis. Fiscal response includes the use of revenue collection (taxes or tax cuts) and expenditure (spending) and can expand or contract economic growth. It is a strategy used alongside monetary policy, through which a central bank influences a nation’s money supply. Britain has been praised for its fiscal response, and strong measures have certainly been taken by the government to stimulate the economy. However, due to the uncertainty of the rapidly evolving situation in times of the pandemic, the response has been developed in a fragmented way. Unprecedented measures have been taken but it remains unclear whether they will be sufficient.

Britain has been praised for its fiscal response, and strong measures have certainly been taken by the government to stimulate the economy

When Mr Rishi Sunak delivered the UK’s 2020 Budged on March 11, it was only weeks after he replaced Sajid Javid as Chancellor of the Exchequer. In response to the coronavirus epidemic, he rewrote the financial plans and allocated an additional 30 billion pounds in direct support. At that point, the budget already presented a fiscal boost greater than during the global financial crisis a decade ago. But it did not stop there.

Since that day more parts of the economy have been shut down as the UK entered a lockdown on the 23rd of March. In such circumstances, service industries such as accommodation and food services, plus retail, have the highest share of vulnerable jobs (McKinsey). In order to support British businesses, another stimulus package was created — this time worth a whooping 330 billion pounds, or 15% of the national GDP. The money is dedicated to fund state-backed loans for all businesses: the government will guarantee 80 percent of each loan and cover interest payments for the first 12 months. This has been identified as a key measure to encourage investment and keep the businesses afloat. Despite this, however, businesses are set to meet difficulties and job loss is inevitable.

It is a truly incredible intervention for any British government, let alone a Conservative one

To prevent the crisis from causing mass unemployment, Sunak announced another stimulus package. The government pledged to pay 80 percent of salaries of employees that have been temporarily laid-off, up to £2,500 per month, a scheme that was later extended to Britain’s 5 million self-employed workers. The significance of this cannot be understated: never before in history had the British government introduced a program on such scale to pay wages. In context, the package goes further than similar actions taken by some Scandinavian countries. Hence, it is a truly incredible intervention for any British government, let alone a Conservative one. Mr. Sunak claimed, “unprecedented measures for unprecedented times” and “this is not a time for ideology and orthodoxy.”

The additional government spending has been a much-needed lifeline for businesses an laid-off workers, but it comes at a cost. Britain was on course for a budget deficit of 55 billion pounds in the fiscal year starting April. Now, the budget deficit could more than triple over the upcoming year to over 175 billion pounds. This is because the government has no choice but to fund the programs through borrowing, as raising taxes would defeat the purpose of injecting more spending power into the economy. The government could struggle to reduce the deficit for several reasons. Firstly, the economy could contract more than expected, leading to less tax revenue. Further, the pound plunged to its lowest level in over 30 years on the 18th of March, trading at just $1.15. While it has since began to recover, a weak currency means that is it more expensive to import from abroad — significant since Britain imports more than it exports.

While increased government spending is expensive and worrying, in the current situation the consequences of spending less would be more disastrous. According to Robert Chote, the head of the Office for Budget Responsibility, “this is not a time to be squeamish about one-off additions to public sector debt. It’s more like a wartime situation.” As the government is prepared to do whatever it takes to boost the economy, additional stimulus packages are not out of question. In extraordinary times like these, it is wise to hope for the best, but prepare for the worst.