Ministers set aside £266BILLION warchest for coronavirus battle

Ministers set aside staggering £266BILLION warchest for coronavirus battle – nearly half usual central government spending – amid fears UK debt could hit £2TRILLION this year

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Ministers have set aside a staggering £266billion warchest for the coronavirus battle – amid fears UK debt could hit £2trillion over the next year.

The government has boosted its contingency fund for the next financial year from just £10billion to more than a quarter of a trillion pounds – equivalent to nearly half of central government spending.

The figure was set in emergency legislation passed with cross-party support last night, and was described as ‘extraordinary’ by economists.

After Chancellor Rishi Sunak announced a series of unprecedented bailouts for workers facing poverty as a result of coronavirus lockdown, the IFS think-tank has warned that the government faces borrowing £200billion.

That would be enough to take UK net debt over the £2trillion mark, something that as recently as the Budget on March 11 was not expected to happen until 2025.

The IFS set out its estimates of the hit to the government finances from coronavirus measures and an economic slowdown

The government’s £266billion contingency fund gives it huge firepower to response to the cornavirus crisis.

The figure is equivalent to around 15 per cent of GDP – or half of normal central government spending for the year.

However, it will add hugely to the nation’s stockpile of debt, as the money will need to be borrowed.

The IFS suggested the deficit for the year could easily top £200billion in the coming financial year.

That would be enough to push UK debt above the £2trillion mark.

The huge expansion of the contingency fund emerged as the IFS released its assessment of the impact on the government’s finances.

It suggested that a conservative estimate of the reduction in GDP from the crisis would be 5 per cent. Others have warned it could be much higher.

But the direct economic impact of that, from lower taxes adn revenues, would be to increase borrowing by £72billion – even taking into account the Bank of England’s interest rates cut and huge quantitative easing programme.

The Chancellor’s promise to cover 80 per cent of the salaries of employees who would otherwise be laid off – up to a monthly maximum of £2,500 – could mean £10billion more borrowing, according to the IFS. However, it stressed again that the figure could end up much bigger.

The total fiscal package so far will drive the government’s debt up by £50billion.

IFS economist Isabel Stockton said the outlook for the UK was ‘uncertain to say the least’, and the effects would be felt for a long time to come.

‘Only taking account of measures announced so far, and even if the economy ‘only’ shrinks by 5 per cent per cent this year, we might expect borrowing in the coming financial year to exceed £175billion, or more than 8 per cent of national income.

‘This would be more than triple the amount forecast in the Budget just two weeks ago.

‘About 40 per cent of that increase would result from new fiscal measures, and the rest from the economic downturn depressing revenues and adding to government spending.

Coronavirus recession could be worse than the credit crunch

Economists are predicting double-digit declines in gross domestic product (GDP) that would dwarf the 6 per cent decline seen between 2008-2009.

Samuel Tombs, at Pantheon Macroeconomics, is predicting a shortfall in GDP of between 15 per cent and 20 per cent in the weeks during the lockdown.

He believes output will shrink by around 1.5 per cent in the first quarter of 2020, but plummet by 13 per cent in the following three months – tipping the UK into recession, as defined by two quarters in a row of declining output.

He said: ‘In normal recessions, many businesses report relatively small incremental declines in output.

‘By contrast, many firms now likely are reporting huge declines in activity.’

‘The deficit could easily swell by much more than that if the economy shrinks by more, if take up of the employment retention scheme is high, or if further substantial fiscal measures are unveiled.

‘A deficit of over £200billion in the coming financial year is well within the bounds of possibility.

‘Yesterday’s announcement in parliament to increase the contingency fund for the coming financial year from £10.6 billion to £266billion suggests the government may be prepared to go even further than that.’

Meanwhile, other experts have warned the economic shock caused by coronavirus will plunge the UK into a steeper recession than the credit crunch.

Economists are predicting double-digit declines in gross domestic product (GDP) that would dwarf the 6 per cent decline seen between 2008-2009.

Samuel Tombs, at Pantheon Macroeconomics, is predicting a shortfall in GDP of between 15 per cent and 20 per cent in the weeks during the lockdown.

He said: ‘In normal recessions, many businesses report relatively small incremental declines in output.

‘By contrast, many firms now likely are reporting huge declines in activity.’

But as the Bank of England has stressed, the impact is likely to be temporary with activity rebounding strongly once social distancing measures are lifted.

Pantheon is forecasting a possible 10 per cent rise in GDP over the third quarter and a 4 per cent increase in the final three months of 2020.

This comes with a big caveat, though, and Mr Tombs cautions a ‘V-shaped recovery is far from assured’.