A deepening dent in UK finances
New day, new regime. The UK government has introduced lockdown restrictions across England in order to curb the spread of COVID-19. Although the infection rates and NHS ICU capacity vary significantly across England, the government decided to follow, belatedly, the SAGE committee’s suggestion on introducing a new lockdown with the hope of allowing for sociable festivities around Christmas. The new restrictions will see parts of the economy shut down and overall economic activity decelerating yet again. Therefore the new measures have been fittingly accompanied by announcements for new financial support by the Treasury and the Bank of England.
Chancellor Rishi Sunak announced the extension of the furlough programme through to March 2021. The scheme has covered up to 80% of the salaries (up to £2,500 per month) for employees who would otherwise be at certain risk of losing their jobs. A similar plan for the support of self-employed people will see that recipients are compensated with 80% of their average profits for the period of November-January, at a cap of £7,500 per month. Both measures will deepen the dent on state finances as monthly costs are estimated at £5bn and £1.4bn for the furlough and self-employed schemes, respectively.
The Bank of England will help fund the costs of the new schemes by extending its purchases of government bonds by £150bn over 2021, raising the total amount of the pandemic-fuelled quantitative easing to £895bn. The Monetary Policy Committee, which has voted unanimously in favour of the plan, has yet to announce full details on the transmission channel through which the additional quantitative easing will boost consumption. It appears that the decision aims at having funds readily available to direct towards areas in need of immediate financial support. This is a good indication that the government and affiliated institutions see value in proactive containment of arising issues instead of reactively “fire-fighting”.
Both announcements for fiscal and monetary support are, overall, a momentary reprieve to hundreds of thousands of families that have seen their life’s work and future prospects evaporate during the last 10 months. Supporting employment and consumption is one safe way to maintain the existing social and corporate structures that have been the backbone of the service-heavy British economy. This is not to say that the solutions are painless or free of caveats.
State finances were not healthy before the crisis, and the combination of increased fiscal spending and ailing tax receipts due to economic stagnation have aggravated any pre-existing concerns. At the same time, the impressive implementation speed and wide coverage of support schemes allows for opportunism and illegal access to funds. Transgressions will be discovered and persecuted belatedly at best; at worst they will stay undiscovered and encourage further appropriations. With unemployment currently at 4.5% and projected to reach almost 8% by summer 2021, the government will have to spend even more in social support and wait even longer until it can consider repairing its finances.
The longer we stay in the state of intermittent lockdowns, the longer it will take for the economy and people’s wellbeing to recover. The circumstances cry for strong leadership and, even more importantly, targeted and cheaper solutions, instead of blanket and politically safe restrictions. Such thoughts are for the near but elusive future. For the time being, let us get through the new lockdown.