Tories’ borrowing binge leaves bleak post-Covid inheritance for next generation

JABS mean jobs, Boris Johnson has often boldly declared.

Such is the economic bounce-back from the pandemic, analysts are now forecasting the UK’s return to pre-Covid levels of economic activity by December.

Christmas, it seems, may not have to be cancelled this year.

On Monday, the leading economic forecaster, the EY Item Club, said the economy was growing at its fastest pace in 80 years with a projected yearly rate of 7.6%, which would make it the biggest surge in annual income since 1941. At this pace, the economy would recover its pre-pandemic size by the year’s end.

On Tuesday, the International Monetary Fund, upgraded its 2021 UK growth forecast from 5.3% to a China-sized 7.0%.

Along with America, Britain is set to enjoy the fastest growth in the G7. The numbers for France are 5.8%, Italy 4.9% and Germany a mere 3.6%.

Analysts put the rosy numbers down to the UK Government’s wage-subsidising schemes, more generous than any other leading economy bar the US, and the rapid rollout of vaccines, arguably the best in the world.

Although economic forecasts often need to be taken with a handful of salt – the EY Item Club gave a health warning that the pandemic’s “future pattern” could affect the accuracy of its forecast – the UK Government was naturally cheered by the predicted numbers.

The PM, again emphasising caution and people could expect “bumps on the road” ahead, succumbed to his innate optimism and purred that “jobs are coming back” and the country was set fair for a “very, very strong recovery”.

Rishi Sunak, also pointing out the country faced many challenges, joined in with alacrity, saying there were “positive signs” the economy was “rebounding faster than initially expected”.

Payroll numbers are up, so too is annual wage growth, mortgage borrowing is at an all-time high, recruitment demand for some workers is outstripping supply, consequently salary hikes of 30% are now “commonplace” for some hard-to-source roles.

On Wednesday in Scotland, the Chancellor hailed how the UK Government’s furlough scheme had saved “millions of jobs”; at its May 2020 peak, 9m people were beneficiaries. But it is now winding down with employers having to pay more of their workers’ wages. It will end by October; as it does, jobless numbers look set to rise.

“A year ago, people were expecting unemployment to peak at 12%; 1980s levels. If you asked them now, they think it will peak at a level half of that,” declared Mr Sunak.

However, the positive signs of a healthy bounce-back are only half the story; there is a less positive half.

To save the economy, the Conservative Government has embarked on a borrowing binge; almost £300bn last year and more than £200bn this year.

The Office for Budget Responsibility says it will take an extra £10bn a year for each of the next three years to address immediate pressures in just three areas of public spending: the NHS; schools and transport.

Last weekend, MPs warned how taxpayers would be exposed to “significant financial risks for decades to come” and urged the Government to set out a clear way to manage the “eye-watering sums of money” spent on battling Covid.

National debt now stands at over £2.2 trillion, just shy of 100% of GDP, a rate not seen since the early 1960s.

The Government has been able to borrow money at very low rates, enabling it to manage the country’s debt. However, inflation is pushing rates higher.

 

In June alone, debt interest cost taxpayers £8.7bn; more than three times the £2.7bn of June 2020.

So, the Chancellor has his work cut out to achieve a balanced budget, as planned, by 2025.

In March, he announced the start of the great clawback, freezing personal allowances and tax bands and raising corporation tax from 19% to 25%.

The pandemic has already caused Mr Johnson to break his party’s manifesto pledge on overseas aid, saving £4.5bn a year. The pension triple lock might be next; the planned 8% hike would cost the Treasury £4bn a year.

A third broken pledge could be a National Insurance increase to pay for the long-overdue plan for social care. This would cost £10bn a year but is causing a Cabinet rift with opponents complaining it would disproportionately affect the young as pensioners don’t pay it.

The fiscally Conservative Chancellor is opposed to a NICs’ hike as are many other Tories given the UK already has the highest overall tax burden since the 1960s.

But a NICs’ increase would have a silver lining for the Scottish Government as, thanks to the Barnett Formula, it would send £1bn to Edinburgh.

As the Chancellor considers his autumn spending review, his wriggle-room looks extremely limited.

The highly-respected Institute for Fiscal Studies noted: “Permanent economic damage done by the pandemic and rising debt interest costs mean…he has little, if any, additional headroom against his stated medium-term target of current budget balance.”

Such circumstances mean Mr Sunak could only announce new expenditure if he paid for it with cuts, new taxes or abandoned his principle of not borrowing in normal times to pay for everyday public spending.

Yet he intends to bear down on public borrowing, despite pressure from No 10 and MPs in more deprived northern England constituencies to spend money.

Any bounce-back – lower-than-expected borrowing this year could provide £30bn of headroom – could be banked, so the Chancellor has money to sweeten the run-in to a 2023 election with modest extra spending here or even a tax cut there.

However, positive signs of recovery in the short term cannot hide the negative experience of payback in the long term.

It is a bleak inheritance the country is set to bestow upon its children, who are set to bear much of the burden of the greatest shock to the economy since WW2.

We will not only have to “learn to live” with the health impacts of Covid but also the economic ones, which, sadly, have already cost too many jabbed people their jobs.

The Herald Scotland

The Herald Scotland

The Herald is a Scottish broadsheet newspaper founded in 1783. The Herald is the longest running national newspaper in the world and is the eighth oldest daily paper in the world. The title was simplified from The Glasgow Herald in 1992