UK economy cannot be ‘fully protected’

A respected think tank has warned that Britain’s economy cannot be fully protected as it continues to be ravaged by the coronavirus pandemic.

The Institute for Fiscal Studies (IFS) also warned that public borrowing has hit a level never seen in peacetime which will mean big tax rises to pay for it in the future.

Support

The IFS has said the government’s efforts to support the economy through jobs business and incomes since lockdown began has cost £200 billion.

In an update originally meant to accompany the now cancelled Budget the think tank claims trying to balance the books will become ever more difficult as the crisis continues.

Higher taxes

The government borrows from investors across the world to pay for the services we use and the Bank Of England then tries to pay for it via higher taxes.

No statement has yet been made by either the Bank or Chancellor Rishi Sunak of how the money might be raised and the Chancellor has just announced a major extension to the furlough scheme which will run for the next six months.

No choice

IFS director Paul Johnson said the government had no choice but to borrow money in the short term, but added there was little it could do to ‘fully protect the economy in the medium run’.

He added: “We are heading for a significantly smaller economy than expected pre-Covid and probably higher spending too.

Tax rises

“Without action, debt – already at its highest level in more than half a century – would carry on rising. Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.”

Britain’s national debt rose above £2 trillion for the first time on August, but the IFS expects it to continue to rise.

Up 80%

By 2024-25 it expects it will be just over 110% of national income – up 80% from before the pandemic started and 35% higher than in the years leading up to the 2008 financial crisis.

It further warned that the historically low interest rate throughout the pandemic, which made it cheaper to borrow, might not last and, unless accompanied by stringer economic growth, could produce higher interest rates which could be ‘hugely problematic for public finances’.

Shrank

In accompanying analysis, Citibank said every major economy in the world bar China shrank in the first half of the year, with Spain and the UK doing the worst with drops in output of around 20%, more than double that experienced in the USA and Germany.

It warned that even after the pandemic is over there will be lingering effects on consumer demand because of increased caution, shifts in behaviour and rising unemployment.