Sunday, July 05, 2020
Sunak has to spend now, and he will have to spend later
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

On Wednesday, straight after prime minister’s questions, when Rishi Sunak stands up to address the House of Commons, it will feel like a budget. And expectations are probably higher than ahead of most budgets, particularly after Boris Johnson’s ‘no big deal’ speech last week, dressed up as his version of Franklin D Roosevelt’s New Deal of the 1930s.

The chancellor has been the undoubted star of the Covid-19 crisis and he will want to ensure that his crown does not slip this week. In some important respects this will not be a budget, however, but merely an economic statement. There will be no accompanying economic forecast or assessment from the Office for Budget Responsibility (OBR), and thus no formal assessment of the impact of this week’s announcements on the economy and the public finances.

The tension in the Treasury leading up to this week’s statement is between those who think the chancellor should act immediately and those that think he should keep most of his powder dry until the next formal budget in the autumn, when there will also be a spending review.

Sunak knows, however, that expectations are high and that politically, neither he nor the government can afford a damp squib. So, despite the unusual nature of this week’s statement it will be meaty.

There are reasons for holding some of the Covid-19 response back. Yesterday saw the reopening of much of the hospitality sector in England, so-called Super Saturday, and other parts of the UK will either follow or, in the case of Northern Ireland, got there slightly faster.

Last week also saw changes in the furlough scheme. From July 1, last Wednesday, employers have been allowed to bring back previously furloughed workers on a part-time basis. Firms will be required to pay for any hours worked, with the government still covering the proportion of usual hours that employees are not worked.

Further changes will take effect from August 1, when businesses will be required to may the National Insurance and pension contributions of furloughed workers. In October, at the end of which the scheme is due to come to closer, firms will pick up 20% of the pay of furloughed workers, the government 60%. The tapering in the scheme is intended to provide firms with an incentive to gradually bring back furloughed workers.

The great unknown, to the Treasury and everybody else, is how much unemployment this will leave us with. It should have better information than is publicly available on how many workers who benefited from the furlough scheme are still furloughed now. It is less than the cumulative 9.3m figure recorded by Her Majesty’s Revenue & Customs (HMRC), probably quite a lot less, but it is hard to be sure.

XpertHR, the employment consultancy, surveyed nearly 200 employers and found that one in 10 furloughed workers are set to lose their jobs by the end of August. Two-thirds will have returned to work by then. The Recruitment and Employment Confederation (REC) recorded nearly a million job postings in the last week of June, many of them in the hospitality sector ahead of reopening. Capital Economics has just revised down its forecast of the likely peak in the unemployment rate from 8.5% to 7%. That would be regarded by the Treasury as a great outcome, amid fears of much higher unemployment.

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Sunday, June 28, 2020
After the bailout, Bailey plots the Bank's exit strategy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

When Andrew Bailey became governor of the Bank of England in March, the usual description of this Threadneedle Street veteran was that he was the ultimate safe pair of hands and a model of discretion. Mark Carney, his predecessor, had developed a reputation for generating headlines, and was happy to wander beyond his brief. Bailey, it seemed, would keep himself within the Bank’s solid walls.

This theory suffered a rather big blow a few days ago when the new governor generated headlines suggesting that Britain almost went bust in March but was saved by the Bank’s exceptional actions. At a stroke, Bailey out-Carneyed Carney and knocked his predecessor but one, Lord (Mervyn) King, out of the park.

The suggestion that the country could have gone bust a few weeks ago has produced an outbreak of harrumphing from economists, Bank veterans and others. Was the Bank doing in March 2020 what the International Monetary Fund did in 1976, bailing out the British economy at a time of great difficulty?

No, but I do not blame journalists for running with the story. You do not look a gift horse in the mouth and the governor’s remarks, in an interview with Sky News, were hard to resist. There was, he said, a “pretty near meltdown” in core financial markets and, had the Bank not announced more quantitative easing (QE) and other measures: “I think the prospects would have been very bad. It would have been very serious.”

It would also have been serious, he suggested, for the government because “we would have a situation where in the worst element, the government would have struggled to fund itself in the short run”.

Critics have pointed out that, ultimately, governments can always fund themselves, the question being at what price. The markets, in other words, would have soaked up whatever gilts (UK government bonds) the government needed to issue to fund its borrowing, if there terms were attractive enough.

This, however, rather spectacularly missed the point. If the government was only able to get its funding away at a high interest rate then that high interest rate would have percolated through to rest of the economy, scuppering the efforts of the authorities to keep short, medium and long-term interest rates down. It would have sent out a confidence-sapping signal and increased the damage to an economy already facing a significant hit.

The Bank’s additional QE, the £200bn in March and a further £100bn this month, has been timed to coincide with the period of maximum pressure on the public finances as a result of the furlough scheme and other emergency measures to support the economy. Those who get twitchy about Bank apparently working so closely with the government and worry that it might be compromising its independence should note, as Bailey did in a letter to the chancellor on Thursday, in his capacity as chairman of the Bank’s financial policy committee, that “the committee attaches great importance to its secondary objective of supporting the government’s economic policy, and will continue to have regard to the impact of its policies on the government’s economic objectives”. You can be independent and still very helpful.

As it is, thanks to the Bank, the government has had no difficulty funding its extraordinary borrowing, which will break all records this year, even managing to do so on occasion at marginally negative interest rates.

It has been hard to keep Bailey own in recent days, and of more importance in the long run than the fuss over whether the government could have funded itself or not were his comments in an article he wrote for Bloomberg, the financial news and information service.

Headed ‘Central Bank Reserves Can’t Be Taken for Granted’, and with a sub-head ‘The current scale of central bank balance sheets mustn’t become a permanent feature’, the article set out the case for unwinding this year’s emergency QE once the crisis is over.

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Sunday, June 21, 2020
The floor's the limit - we must avoid negative interest rates
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

As widely expected, the Bank of England announced additional quantitative easing (QE) on Thursday, pumping in a further £100bn. The Bank’s monetary policy committee (MPC) did not cut its main interest rate below zero, leaving it at 0.1%, despite some suggestions that it might do so, and hints from some members that negative rates are part of its armoury.

I shall come on to negative rates in a moment. It may seem a little odd, when the Bank announces a further £100bn of QE, to describe the decision as hawkish, but it was. Instead of a unanimous decision in favour of expanding the asset purchase programme, one member, the Bank’s chief economist Andy Haldane, voted against because “the recovery in demand and output was occurring sooner and materially faster than had been expected at the time of the previous MPC meeting”.

In general, while noting that the risks in the labour market were on the downside, the MPC said that emerging evidence pointed to a less severe Covid-19 downturn than it had set out last month in its May monetary policy report. The Bank, it seems, has moved from the gloomy end of the spectrum into the pack.

It has the same evidence to look at as the rest of us, but it also has a little more, in the form of the reports from its network of regional agents around the UK and from its decision-making panel (DMP), which consists of 8,000 chief financial officers from small, medium and large businesses. It is run from Nottingham University.

The latest survey, carried out last month, showed that businesses expect sales in the current quarter to be 42% lower than they otherwise would have been, and investment 43% down. This is very gloomy but marginally less so than in April, when the expectations were for second quarter falls of 44% and 50% respectively.

The survey also shows the impact of the chancellor’s furlough scheme, with firms now expecting a 6% drop in job numbers this quarter, down from 18% in April.

Perhaps most interesting was what the survey showed about the shape of the recovery. As noted, firms expect sales to be around 40% below normal in the current quarter; 30% below in the July-September quarter; 20% down in the final quarter of this year and 10% in the first quarter of next year. This is the economic “V” I have often referred to; the economy picking up quarter by quarter as activity returns.

What is also clear, however, is that there will be lasting negative effects elsewhere. Business investment will lag the recovery in sales and will still be 20% below normal in the first three months of the year. The employment shakeout, meanwhile, will be most intense in the post-furlough period at the end of the year, when firms expect a hefty 10% drop in job numbers.

It is a very plausible recovery scenario, but we are not out of the woods yet, and we are not beyond the point at which the Bank will have to consider further QE or negative interest rates. If the economy were to suffer a further setback, say from a second wave of Covid-19 in the autumn, all options would be back on the table. Negative rates have been avoided so far, but the story may not yet be over. I hope it is, but we shall see.

If you think that negative interest rates do not feel right, I agree. They turn the basics of finance on their head. An interest rate is the reward for deferring consumption from now until later. By the same token, borrowers have to pay an interest rate to spend money now they did not have. Only if there is an overwhelming case for bring forward consumption from the future is there an argument, though negative rates may or may not achieve this. Nor, to bring it to the current debate, would cutting interest rates on commercial bank reserves at the Bank necessarily make much difference to the amount that banks lend into the economy.

A better case for negative interest rates would be if current and expected inflation was itself heading below zero, in other words into deflationary territory. A Bank rate of 0.1% with inflation at 2% means that official interest rates are negative, in real terms, by almost two percentage points. A 0.1% rate with -2% inflation, falling prices, represents a significantly positive real interest rate.

Though inflation is currently low, at 0.5%, and set to fall further over the summer, it is expected to rise again as lockdown eases further and a degree of normality returns. Some, like the veteran monetarist economist Tim Congdon, suggest that current very high levels of money supply growth point to a significant inflation shock to come. The inflation outlook does not offer an argument for negative interest rates.

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Sunday, June 14, 2020
We need imaginative ideas on the long road back for jobs
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Some things are worth getting up early for, and Friday’s 7am clutch of official figures on the economy fell into that category. I can safely say that I never expected to see anything like a drop of more than a fifth in the UK’s gross domestic product in a month.

Even more surprising, perhaps, was that the figures were not surprising. Roughly speaking, the lockdown has taken out a quarter of Britain’s GDP, April’s 20.4% drop being preceded by a 5.8% fall in March. Almost two decades of growth were wiped out in two months. The OECD says the UK is heading for an unenviable record; the worst recession among leading economies.

An economy that had shown no growth since Boris Johnson became prime minister last summer began to totter in February and toppled over the edge when the lockdown started on March 23. Services fell by 19% in April and 24% between February and April; manufacturing by 24% and 28% respectively, and construction by 40% and 44%.

Some weeks ago, as you may remember, I wrote that the lockdown would have shut down nearly a third of the economy, so a 25% lockdown fall was not a surprise. It could have been worse; the Office for Budget Responsibility’s scenario had a 35% fall in GDP in the second quarter, though that was based on the assumption of a full three-month lockdown, and that the impact would not begin until April.

And, extraordinary though Friday’s figures were, they represent a time, albeit a recent one, of maximum weakness for the economy, a full month of lockdown. I have long argued that this will represent the low point of the recession, a view supported by Jonathan Athow, deputy national statistician for economic statistics, on Friday. The next set of monthly GDP figures will be as interesting, because they will provide the first indication of how rapidly the economy is lifting off the bottom.

Before that, on Tuesday we will get another set of official figures, those for the labour market; employment, unemployment and pay. These, in contrast to the GDP figures, are unlikely to give the full picture of the consequences of this crisis.

Rishi Sunak’s job retention scheme now covers 8.9m furloughed employees, while its self-employment equivalent encompasses 2.6m people. When I wrote on the front page of this newspaper on March 22 about this unprecedented peacetime government intervention in the economy, the consensus was that the number of people furloughed might reach 4m or 5m. It is more than double that and, to put it in perspective, 11.5m represents nearly 42% of all private sector employment in Britain.

How do we prevent a jobs’ bloodbath when the furlough scheme begins to wind at the end of July – when employers will be required to pick up a small part of the bill and employees will be allowed to work again – and comes to an end completely at the end of October?

Clearly, if this unprecedented intervention is to have worked, then most of the furloughed employees will need to have returned to work and the self-employed currently being helped will also have to see a return to something approaching business as usual. The schemes, after all, were never intended to be permanent but to provide a bridge back to normality.

The biggest and most significant employment scheme the government can deliver is thus a further easing of the lockdown. That is why the chancellor is urging people to spend when non-essential shops open tomorrow. It is also why he is said to be keen on the two metre social distancing guidance being reduced to one metre, which will make the difference between a quarter of pubs re-opening next month and three-quarters doing so.

The delays in full primary school re-openings, together with continued uncertainty over whether a full return will be possible for primaries and secondaries in September, was a disappointment. Previous studies of pandemics have shown that school closures are a key factor in their economic and labour market impact.

Even with an easing of the lockdown, Sunak is said to fear that 3.5m more people could be left unemployed when the dust settles later in the year. To put that in perspective, it would imply more than 4.8m people unemployed, or 14% of the workforce. We have never had an unemployment level above 4m, and 14% compares with the unemployment rate peak of 11.9% in the 1980s, 10.7% the 1990s and 8.5% after the financial crisis.

What can be done about it? We know where the vulnerabilities lie. Most of the jobs that have been furloughed, 1.6m, are in retailing, including cars, followed by hospitality, 1.4m, manufacturing, 831,000, and construction, 680,000. The biggest take-up on the self-employment scheme has been in construction.

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Sunday, June 07, 2020
A groggy recovery is under way but the real test comes later
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

On Friday, the Office for National Statistics (ONS) will publish its monthly estimate of gross domestic product for April. That may not sound like the most momentous event but stop all the clocks, cut off the telephone, it will be, reflecting a month in which the economy was almost dead to the world.

The crash in GDP in April will put the previous monthly record, March’s 5.8% plunge, in the shade. It will generate many headlines. But it is, if not old news, a reflection of how the economy was at time of maximum lockdown, not as it is now.

What we have seen since then is a gradual, if sometimes groggy, pick-up from those extremely depressed April levels. The latest purchasing managers’ surveys, for services, manufacturing and construction, show that activity, while still below normal, is less depressed than it was. The composite purchasing managers’ index rose from 13.8 in April to 30 last month.

The ONS, which has responded well in this crisis, is producing faster indicators on its effects. In businesses surveyed over the period to May 17, a quarter of those which had temporarily ceased trading intended to start again over the following four weeks, so many will done so, and a further 30% intended to restart after four weeks.

Shipping arrivals in UK ports, a new favourite of mine, are now on an upward trend, while one phenomenon at the start of the crisis – shortages and price rises for products that people were desperate to buy for the lockdown - has now pretty much disappeared. Things are not normal, but they are more like normal than they were.

Hudson Contract, a firm which provides payroll and other services to the construction industry, estimates that demand for labour fell by 70% in April, before rising by 40% last month as sites reopened. More generally, there are early signs of an uptick in advertised job vacancies.

In some cases, the revival between April and May was modest. The Society of Motor Manufacturers and Traders (SMMT) reported that new car registrations last month were down by 89% on a year earlier. In normal circumstances that would be regarded as dreadful, but it was better than April’s 97.3% fall (including a 98.7% fall among private buyers). And, given that car showrooms were closed in May, even achieving sales a tenth or so of normal was an achievement. The picture will improve a lot this month.

Economic revival from the April low-point is not rocket science, or even medical science. Lockdowns combined with people’s maximum fears of contact were bound to shut down large areas of activity. Both are easing, though people seem keener to relax for social gatherings and shopping than to return to work, and activity will thus recover.

This is not, of course, just a British phenomenon and, if anything, the UK is a laggard in easing the lockdown. Economists at UBS estimate that, of 42 countries they monitor, the number imposing severe restrictions on mobility has dropped from 33 to 11 over the past five weeks and mobility is up from 38% to 55% of normal. The world is waking up from its coronavirus-induced coma.

What is the biggest risk to the economy’s gradual, if groggy, emergence from this shock? A second wave of the virus as we move into the autumn and winter is the obvious danger. I have written before that, if the justification for the lockdown was to prevent an unprepared NHS being overwhelmed, it would be hard to justify a second lockdown, given that there has been time to add to capacity, including currently unused Nightingale hospitals.

But this is a jumpy, erratic and inconsistent government, driven as much by the polls – as in the case of quarantine policy for overseas arrivals – as by the science, so anything is possible. And a second wave, if it occurred, would see individuals, businesses and sporting bodies take action that would replicate the lockdown in their impact.

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Sunday, May 31, 2020
Levelling up has become even more of an uphill task
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

A long time ago, though not in a galaxy far, far away, we were in a different world. I am talking about early March in this country, less than three months ago. When, on March 11, Rishi Sunak presented his first budget, the economic costs of this coronavirus outbreak were starting to become clear.

The chancellor announced a small package of measures, intended to help hardest hit firm and, by the time he stood up on budget day, the Bank of England had cut interest rates from 0.75% to 0.25%, unveiled a new term funding scheme for small firms and relaxed the countercyclical capital buffer for banks.

Most of the budget, indeed most of the debate in government at that time, was, however, about the so-called “levelling up” agenda. Sunak had made it clear before the budget that he was not going to miss the opportunity to try to deliver on that agenda, mainly through a substantial boost to infrastructure spending. I do not blame him for that, even though his efforts have bene subsequently overshadowed. Budgets had become rare events – there was not one during the whole of 2019 – so he had to seize the moment.

What is clear, however, is that levelling up to improve the situation of “left behind” towns and regions presents an enormous challenge. This is partly, of course, because of Brexit. Every credible analysis, including the government’s own, shows that the biggest negative effects of leaving the EU will be on the regions. The government’s own assessment saw the northeast hit hardest, followed by the West Midlands, Northern Ireland and the northwest.

It is also because the trends firmly point in the other direction. On Thursday EY, the accountancy giant, published its 2020 UK Attractiveness Survey. The survey has for more than two decades recorded inward investment, foreign direct investment (FDI) projects, and ranked this country against competitors.

There was good and bad news in the survey. As an EU member, the UK was successful in attracting FDI, both from the rest of Europe and the rest of the world. Lighter-touch regulations, particularly in the labour market, helped, as did the English language and other factors. For many firms, a UK location was an attractive proposition for accessing the EU single market.

The bad news in the survey is that, while inward investment has continued, the UK lost top spot in 2019, for the first time since 1997. And, to add insult to injury for those who have little time for the entente cordiale, it was lost to France. Our near neighbour had 1,197 projects, the UK 1,109.

The good news, for those looking to the future, is that this country appears to be establishing a new comparative advantage in digital technology. Last year the UK secured 30% of all European FDI in digital technology, with 432 projects, which was more than France and Germany combined. Since 2013, digital technology has accounted for the biggest number of UK inward investment projects.

This, as I say, is good news, and it is logical. Digital technology is much less reliant on single market membership, or existing patterns of trade. The UK suffers from a lack of competitiveness in many sectors, but not in digital technology, including areas like fintech, financial technology.

This success, however, highlights the challenge in levelling up the economy. For foreign investors, digital investment mainly means London. It is London, by and large, where there is a successful tech cluster, with the right people, infrastructure and business climate. It meant that last year, 69% of digital projects were in London, and most of the rest was in or close to the UK’s so-called core cities; Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield. Small-town Britain barely got a look-in.

It also meant that last year, 538 inward investment projects were in London, 48.5% of the total. Yes, almost half of all FDI projects were in the capital, and its rising share of the UK total suggests that it will not be long before London has more than half of the FDI projects coming into the UK.

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Sunday, May 24, 2020
Signs of life start to flicker in our lockdown economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

When, a few days ago, Rishi Sunak warned of “a severe recession, the likes of which we have not seen”, the surprise was that nobody was surprised. He was also able to say it without facing criticism. Among the many changes brought about by this crisis, the old rule that chancellors should always be upbeat, even when standing on the burning deck, appears to have been shelved.

I could not help contrasting it with the fate of Alistair Darling, a month before the collapse of Lehman Brothers in 2008. The then chancellor, now Lord Darling, told an interviewer that the economic times were “arguably the worst they’ve been in 60 years” and the situation was going to “be more profound and long-lasting than people thought”.

He was pulled up for his comments, partly because there was a more economically aware prime minister in Downing Street – Gordon Brown had been chancellor for 10 years – and partly because there was at least some room for doubt about what would happen; the big bank failures were yet to happen.

This time, with both the official forecaster (the Office for Budget Responsibility) and the Bank of England setting out scenarios which envisage the deepest recession since the early 1700s, a chancellor who tried to pretend that the economy was just suffering from a little scratch would risk his credibility.

Jim Callaghan, Labour chancellor in the run-up to sterling’s 1967 devaluation, once described the deeply disconcerting feeling of seeing Britain’s currency reserves pouring away in a vain attempt to defend the pound. Sunak is experiencing the domestic equivalent; bucketloads of money flowing out of the Treasury to support the economy during the crisis and tax revenues only trickling, partly as an element of that support.

The fiscal consequences of the crisis are becoming clearer. Figures on Friday showed that the government borrowed £62bn last month, more than the £55bn officially predicted in March for the whole of 2020-21. Retail sales volumes slumped by 18% last month.

The monetary consequences are also pretty clear. For the first time in its 326-year history, the Bank of England is contemplating negative interest rates; charging commercial banks to keep their reserves at the Bank. We are in a world, it seems, in which even a 0.1% Bank rate is not low enough, even alongside an expected additional £100bn of quantitative easing (QE) next month. Already the government has sold some debt, gilt-edged securities, at a negative interest rate.

I think the Bank should hold off from crossing this particular rubicon. The economic effects of marginally negative interest rates would be tiny, at best, and there are other things the Bank can do first, including that extra QE.

Whether the Bank can hold off from negative rates depends of course, on how the economy does. There is some evidence from economists that, even in the absence of a lockdown, economies would have suffered a significant hit, as people adopted voluntary social distancing and businesses responded to customer and employee concerns.

The lockdown legitimised such concerns, however, and the government’s behavioural advisers, having thought that the most difficult thing would be to get people to abide by the lockdown, now finds it is harder to get them out of it.

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Sunday, May 17, 2020
There's no need for tax rises now, and maybe not later
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In a moment I shall have something even more interesting to say on the economics of this pandemic, but first let me deal with the great lumbering elephant in the room. This is the extent of the government’s support for the economy during the crisis – including Rishi Sunak’s extension of the furloughing scheme last week – and how we will pay for it.

It is a question I get asked a lot. How much will taxes have to go up to pay for this and, whether Boris Johnson uses the A-word or not, will it mean a new round of austerity, or the cancellation of previously announced “levelling up” infrastructure spending?

That there is a lot more money sloshing around is not in doubt, though it is important to distinguish between different kinds of government supports. Some of the most eye-catching numbers, for example, the £330bn of loan guarantees announced a few weeks ago, are contingent liabilities.

That there has been actual spending is not in doubt. The Office for Budget Responsibility, the fiscal watchdog, updated its estimates on Thursday. It now thinks that the policy response to the crisis will cost £123billion this year, of which the bulk, £118bn, is extra spending.

It estimates that the addition to borrowing will be more than that. Its new estimate for the budget deficit this year, public sector net borrowing, is £298bn, up from £273bn in its first coronavirus scenario in April. That is roughly 15% of gross domestic product and compares with a March forecast, prepared before the extent of the coronavirus crisis and lockdown were clear, of just under £55bn. £298bn is almost double the maximum annual deficit, in cash terms, in the financial crisis.

The increase in borrowing goes beyond the direct effect of government measures because of the recession’s impact on tax revenues and the effect of significantly higher unemployment on the welfare bill.

It is a very big fiscal hole. What should the chancellor do about it? This year’s deficit has to be regarded as a sunk cost, an emergency increase in borrowing, for entirely understandable reasons, that cannot and should not be recovered.

That still leaves the question of what happens beyond this year. How quickly does the deficit come back down again, or has this crisis opened up a permanently much larger gap between government spending and tax revenues? And, as well as this, do the fiscal rules still matter, or has this crisis provided a cast-iron excuse for abandoning them? Before he was diverted on to other things, the chancellor said he would review the rules in his autumn budget.

Nobody sane would suggest that tax rises are the right thing to do when the economy is emerging from its deepest recession in modern times, so in the short term, talk of higher taxes should be safely put one side.

The question is what happens later, say after two or three years, and here the latest projections from the National Institute of Economic and Social Research (Niesr) provide a useful way of thinking about it.

The Niesr projections suggested that there will be a longer-term impact on the public finances from this crisis. So, in 2-23-24 and 2024-25, government debt is more the 90% of GDP – the permanent addition from around 80% as a result of this crisis, and the budget deficit is about 3% of GDP, higher than it has been recently; in 2018-19 it was less than 2%

Most importantly, in terms of the existing fiscal rules, the current budget deficit, excluding public investment, settles at about £20bn a year. The government is committed to borrowing only to invest, in other words balancing the current budget. This £20bn, rather than £300bn or even £500bn, provides a guide to the kind of extra revenues the government might want to raise in the medium term. It is a lot of money but in fiscal terms a drop in the ocean. We should not worry unduly about big tax rises to come.

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