The UK’s budget deficit is set to rise further past the unprecedented £300bn mark after chancellor Rishi Sunak’s £30bn spending package of VAT cuts and job support programmes, the Institute for Fiscal Studies (IFS) think tank has said.
It said such a high pile of debt meant future statements from the chancellor “are likely to involve a less pleasant set of announcements”. Yet the IFS said that with borrowing costs at record lows, “those decisions can – and should – be left for another year”.
Sunak today announced another huge round of stimulus measures in a summer statement. He launched a “job retention bonus” programme worth up to £9bn that will pay companies to take back furloughed workers.
He slashed VAT in the hospitality and to five per cent for six months. And he announced a holiday for the stamp duty property tax, raising the payment threshold to £500,000.
On top of this, he introduced a novel ‘dine out to help out’ scheme which will give people steep discounts if they eat out. This is aimed at helping the bruised hospitality sector.
The package could cost up to £30bn, depending on the uptake of the schemes, the Treasury said. It would take total government spending on coronavirus to close to £190bn so far.
Budget deficit to go well past WWII levels
IFS deputy director Carl Emmerson said: “There is a huge amount of uncertainty around the public finances – but these measures are likely to push the deficit further above £300 billion.”
He said that “would be easily the highest as a share of national income since the Second World War”.
However, he said: “Of course this additional borrowing is all currently being borrowed at very low interest rates.”
The Bank of England has slashed interest rates and lowered borrowing costs across the economy by creating money to buy hundreds of billions of pounds worth of bonds. It has sent the UK government’s borrowing costs plunging.
Despite this, the IFS said the soaring levels of public debt are likely to need addressing because the economy is unlikely to fully recover from the Covid hit.
Yet Emmerson said it was not an immediate worry. “Those decisions can – and should – be left for another year,” he said.
Package ‘focussed on the right things’
Paul Johnson, director of the IFS, said Sunak’s stimulus package “was focussed on the right things, such as jobs for the young”.
His verdict will please the government given the esteem in which the IFS – a think tank that analyses taxes and spending – is held.
However, Johnson suggested that “much of the job retention bonus cash will be paid in respect of employees who would have, or indeed have already, returned to work anyway”.
He said this “reflects how hard it is to target resources only where they are really needed”.
On the VAT cuts and vouchers for the hospitality sector, Helen Miller, also an IFS deputy director, said: “Social distancing will remain a constraint in many cases.”
She said: “Here the measures will simply be a giveaway to consumers and firms – a giveaway not targeted at those who are struggling most.”