Rishi Sunak has vowed there will be “no limit” to the funding needed to pull the UK economy and its workers through the coronavirus crisis.
Measures include a VAT holiday worth around £30 billion and a fund for workers to receive 80% of their pay. But the costs are expected to send debt levels soaring with around 2% of UK GDP pledged.
He was asked where the money would come from and said there would be a “comprehensive update to the gilt refinancing remit”, which means debt levels are likely to hit heights not seen in peacetime.
The debts are funded through the issuing of gilts – or Government bonds – and the Bank of England has already said it will buy up £200 billion of bonds to shore up businesses facing collapse.
The deficit was expected to be just under £60 billion this financial year. But measures announced at the Budget added up £12 billion, followed by a further £20 billion and then £7 billion. The wage package will cost around £9 billion but could be much higher.
However, economists recognised the importance of keeping the economy afloat during the outbreak, with the pound up 1.5% at 1.167 dollars – suggesting investors are happy to see the UK Government spend the extra cash.
Melissa Davies, economist at Redburn, said: “The UK can afford this and shouldn’t be squeamish about running a much larger deficit. It’s much better to make a proactive decision to protect corporate cash flows and household incomes, rather than end up with a much larger deficit by default because domestic demand collapses.”
The UK is now running a ‘virus war’ economy. The usual rules do not applyKallum Pickering
Matthew Cady, investment strategist at Brooks Macdonald, explained that the funding will take up to two years to work its way through to the real economy, of people spending the money.
He added: “While easier monetary policy will turbocharge the recovery when it comes, it takes longer to work in the real economy, acting with a lag of between 18 and 24 months.
“But with UK policy makers now giving it both fiscal and monetary barrels, there are good chances that this stays a short-term impact.”
And Kallum Pickering, senior economist at Berenberg, said if this goes on beyond six months, it will cost the Treasury more than 10% of GDP to fund.
He added: “The UK is now running a ‘virus war’ economy. The usual rules do not apply.
“We continue to see enough evidence that, in the UK and in other advanced economies, policy makers will likely pull it off, in the end.”