Coronavirus: How much will it cost the UK?

  • In Business
  • 2020-10-22 11:32:03Z
  • By BBC
Coronavirus: How much will it cost the UK?
Coronavirus: How much will it cost the UK?  

Many parts of the UK are now facing further restrictions as a second wave of coronavirus infections sweeps across the country.

This will force the government to spend even more money on measures to support local economies.

How much will coronavirus cost the UK?

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.

According to the Office for Budget Responsibility (OBR), which keeps tabs on government spending, the government would have to borrow £372bn for the current financial year (April 2020 to April 2021).

And that's before the cost of new lockdowns and support measures announced in the autumn are considered.

To put it into context: before the crisis, the government was expecting to borrow about £55bn for the whole financial year, but it has already borrowed £208.5bn so far this year.

Up to 7 August, the total cost of measures announced to combat Covid-19 was £210bn, according to the National Audit Office, another body which monitors public spending.

This includes the Job Retention Scheme, where struggling firms could put workers on furlough. This is now being replaced with a less generous scheme, which runs for six months from 1 November.

There will also be extra support in areas facing new restrictions this winter, which will cost billions more.

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 less.

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

How will the money be raised?

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 in the meantime.

The Bank of England will buy some of those bonds, which will make raising the money easier.

In June it announced another £100bn round of called "quantitative easing", a process where the Bank buys government bonds to improve the health of the economy by encouraging more spending and investment.

Senior bank figures have discussed the possibility of doing even more in coming months.

Can the UK afford all this debt?

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.

Even if the economy bounces straight back, there will be more debt, and so more interest to pay.

But many commentators fear the recovery will take much longer than that.

So the government will be bringing in less money in taxes than it expected, and spending more to support people and the economy.

That will leave it with a gap between its spending plans, and the money coming in to pay for them - that's known as the deficit.

Will I have to pay more tax?

The deficit leaves the government with a choice: increase borrowing, raise taxes, or cut spending. 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 - but it would be difficult to reduce health spending after a big pandemic.

State pensions, another big spending item, are protected by a system called the "triple lock", which guarantees at least a 2.5% increase every year. This was also guaranteed in the manifesto.

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

So how will this affect my life?

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.

But if doctors and nurses have their wages frozen, or benefits rise more slowly, that will be noticed by those affected.


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