£300 billion. That is the figure that estimates suggest the COVID-19 pandemic will cost the UK Treasury. If this turns out to be correct, Britain will have a £337 billion budget deficit rather than the £55 billion forecast by Chancellor Rishi Sunak at the March Budget – a Budget that feels a world away from where we are today. And this is the Treasury’s best case scenario. The question facing the Government is, how are we going to roll back this deficit?
One of the few things Prime Minister Boris Johnson has made very clear is that he does not want to return to the economics of austerity. The Conservative Party has long been perceived as the party of economic safeguards yes – but in recent years also as the party of austerity, and voters in Britain have been vocal in their feelings of being generally fed up with the years of austerity. So upon taking the helm Johnson unleashed a host of spending pledges to demonstrate he was turning a page for the Party and doing away with austerity.
But the lay of the land has changed dramatically and with the furlough scheme having been extended until October and debt piling high, action is needed. So if not austerity, what?
One obvious policy option to plug the gap is to increase taxes. This is a precarious route for Number 10 and the Treasury to go down. In doing so they would break one of the Conservative Party’s key manifesto pledges not to raise the rate of income tax, VAT or National Insurance. Now, the manifesto was written for a different world and Governments have survived many a U-turn before, so perhaps the combined brains of Number 10 and Treasury could clear that particular hurdle. However, the real opposition may lie on the Tory backbenches who will not be happy to see a rise in tax levels.
More likely, is that we will treat COVID-19 debt like wartime debt that they will refinance and pay back extremely slowly, probably over the course of the next half a century. Yes, this is kicking the can down the road, but it would avoid drastic short term measures like steep tax rises or austerity. However, the old guard of the Conservative Party may still not be happy. They come of a generation of Tory’s that understand an economic crisis to mean responsive cuts and they will not like having huge debt hanging over our collective heads. And they are also not a group known for their fondness of keeping their thoughts to themselves. Expect future public spending commitments to be met by not so muted grumbling about how much debt the country is in. It is just one more compelling reason for backbenchers to resist Government spending, which they are suspicious of even when the country is not saddled with a massive debt.
Johnson, with his popularity suffering, cannot afford to fight a rebellion on his backbenches. Particularly not with a competent Labour leader at the helm of the Opposition. The Prime Minister has some tough economic decisions ahead of him, and he may be forced to choose between keeping his big spending promises to the electorate, or staying friends with his own backbenches. Neither path will be easy.