The Office for Budget Responsibility (OBR), the independent economic watchdog, this week commented on the latest situation regarding the overall government financing position. Government borrowing is predicted to reach £370 billion this year, similar to the levels seen in the Second World War. According to the ONS borrowing in May 2020 was around £55 billion, which is roughly nine times as much as the previous highest monthly borrowing record. It goes without saying almost that this level of borrowing is unsustainable in the long run and that there will inevitably be a need at some stage to try and rebalance the books more than they currently are. The bitter irony of this is that the rising public debt comes after the best part of a decade of so called austerity, the results of which were more or less wiped out in the first month or so of lockdown.
Prime Minister Boris Johnson has ruled out a return to austerity and, if this commitment is subsequently carried through, then the OBR in its Fiscal Sustainability Report seems to believe that tax rises are unavoidable. In an unfortunate coincidence of timing, the Chancellor's latest package of £30 billion of measures to further help ride out the pandemic was announced too late for the OBR to incorporate the numbers into their analysis so that presumably makes the position even more extreme. The Report discusses three scenarios described as 'upside', 'central' and 'downside'. Both the central and downside scenarios foresee that medium-term output will drop between 3% and 6% respectively. Borrowing will remain higher than it was pre-pandemic and the overall estimated position assumes, perhaps with a degree of optimism that is partly justified and partly hopeful, that interest rates will stay low (which seems quite likely) and that there will be no interruption to 'normal' rates of growth post-pandemic, which can probably be assumed with less confidence. All of which means that a gap exists which needs to be closed.
The OBR notes that it is apparently government policy to use borrowing to get through 'bad' times and notes that presumably in 'good' times it will be reduced to create 'fiscal space'; similar to saving money for a rainy day with the distinction that here we are talking about paying for the gold-plated umbrella after the rain clouds have passed. Part of the wherewithal to pay back borrowings would hopefully be raised from increased revenues as the economy recovers but this is unlikely to be anywhere near enough. Other measures will need to be looked at too. No firm announcements have been made yet though the October Budget will hopefully shed more light. But several schemes have been speculated on in the media. These include looking at the triple-lock pension which ties pension payments to the higher of inflation, increases in wages and 2.5%. Another possible target is Capital Gains Tax where the Chancellor has asked the Office of Tax Simplification to look at ensuring that it is 'fit for purpose'. This may not imply anything sinister – but in the current climate it would be surprising if the Chancellor did not look at the opportunity to raise more taxes especially from capital gains rather than taxes on income.
Given the size of the gap in public finances and the massive increase in debt that has occurred it would be very unlikely that a firm recovery plan to rebalance finances will emerge just in this year's Budget. Rather we can expect a series of budgets into the medium-term in which the recovery plan evolves based on events. This is the case even in 'normal' times; but the current situation is so abnormal that we can expect to see the evolutionary trends based on events greatly amplified. One thing seems for sure; we can expect a tough series of budgets not just in 2020 but far beyond it.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.