Once more we are fighting a war with borrowed money, only this time it is not to rescue the villainous banking sector from its excesses. Now Britain will sink its few pennies and more into treating victims of the coronavirus, rescuing businesses losing customers and staff in equal measure, while plugging holes in a financial system that panics more often than Dad’s Army’s Corporal Jones.
This time is different, says the new chancellor, Rishi Sunak, who last week laid out an expansive and overtly confident sweep of measures to tackle the Covid-19 outbreak and do much else besides. He outlined plans in the government’s first budget to spend £12bn on battling the virus while opening up two new fronts. First of these was an attack on austerity and the UK’s worn-out public services, with a further £18bn of spending; second was a revamp of the nation’s infrastructure, costing £600bn.
Sunak said companies would pay for a quarter of the bill by forgoing a cut in corporation tax from 18% to 16%. They will also lose access to billions of pounds of tax breaks available via the entrepreneurs’ relief scheme. The other three-quarters will be borrowed, leaving the national debt to rise by an extra £125bn against spending plans put in place last March, and by more than £250bn compared with the spending plans of Sunak’s predecessor, Philip Hammond, in 2018.
There is a consensus on the left and now the right of the political spectrum that higher borrowing makes little difference to the stability of the government’s finances in an age of low interest rates. Over the next five years the UK’s total borrowings will reach more than £2 trillion. The cost of borrowing will rise from £32bn a year in 2018 to £55bn in the 12 months from April.
If the annual cost of running a £2tn debt mountain stabilises at £61bn in 2024, as the government’s forecaster, the Office for Budget Responsibility (OBR), predicts, then all will be OK, won’t it?
Well, not really, when you think that the budget said virtually nothing about the funds needed to reduce carbon emissions to net zero by the government’s own target of 2050; when the chancellor avoided saying how much he was prepared to spend solving the social-care crisis; and when the vast and growing hole in local government finances was ignored. The debts are just going to pile up even higher.
Who will run the 40 new hospitals Sunak said he would build? Come to that, who will build them once the new migration rules are in place? The same question could be asked of colleges of further education, given the green light in the budget.
There is money for 50,000 nurses, says Sunak. It’s not clear where these nurses will appear from, and it is even less clear where all the other staff who are needed to run a state-of-the-art hospital will be found, let alone who will pay for them.
Dominic Cummings, the prime minister’s chief adviser, has revealed through his blogs and his visible influence on the budget how he thinks about this problem. It is clear that he believes productivity gains from investment in scientific research will be spectacular. An increase in worker productivity, following widespread adoption of artificial intelligence, will push up wages, send tax receipts soaring and close the deficit. It’s that simple.
The Treasury expects to double public investment in research and development to £22bn by 2024–25. Cummings wants to go further, using a £200m life sciences venture capital fund and £900m of grants to foster the business innovation Sunak says will encourage an increase in private investment from £26bn to £44bn. This effort would mean the UK spending 2.4% of GDP on R&D, the same percentage as the average for countries within the Organisation for Economic Co-operation and Development.
The OBR agrees that productivity will grow following a bonanza of investment spending, but is sceptical the government will manage to find enough projects for its newly borrowed cash or that the benefits will be quite so spectacular. After all, official figures going back to 1981 show the UK’s R&D has never managed to exceed 1.7% of GDP.
That’s partly why the OBR’s economic forecasting team believe a “sugar rush” of GDP growth to 1.8% next year will quickly dissipate, leaving the UK to struggle on with growth around 1% from 2024.
This level of growth resembles that of heavily indebted Japan and is too low to fund shiny new infrastructure, repair the fabric of public services and cope with a virus outbreak that the chief scientific adviser, Sir Patrick Vallance, says could become an annual event.
If this all sounds gloomy, Sunak has an opportunity in the autumn to show we are all in it together, and tax the wealthy to fill the holes in his budget. If he piles debt upon debt, it won’t just be the UK’s growth rate that looks Japanese.
