The government has relied primarily on borrowing rather than taxation to fund its increased expenditures during the Covid-19 pandemic. It will continue to do so until the economy has recovered, because any premature increase in taxation could jeopardise the nascent recovery. It is currently able to meet its funding requirements through borrowing at a modest cost, but it will need to increase taxation to repay public debt and to fund its ambitious manifesto commitments. The government will probably delay the implementation of any increase in taxation until the economy has securely recovered. Economic growth and inflation would help to reduce the burden of public debt and taxation.
Chancellor Rishi Sunak has warned of the ‘difficult decisions’ that lie ahead following the cancellation of his planned autumn statement and the publication of his winter economic plan. The government will need to increase borrowing or taxation (or both) because the chancellor has said that that public spending will increase above inflation next year. He will need to outline how the government intends to reduce its reliance on borrowing and to begin repaying the debt that it has incurred in combatting Covid-19 at Budget 2021 to maintain confidence in the government’s ability to manage the economy. While the government is currently able to meet its borrowing requirements, the financial markets will begin to become increasingly restless unless the government announces a credible plan to reassert control over public finances.
The government will continue to use fiscal policy (namely, how much it spends, and how it finances that through taxation or borrowing or both) with supportive monetary policy from the Bank of England to avert job losses and to nurse the economy back to recovery. Fiscal policies have provided an emergency lifeline during the pandemic and will play an important role in the economic recovery.
Any premature increase in taxation in the short term could choke the economy while it is struggling to recover. The government has committed itself to increasing public expenditure on the health service and other measures. (The chancellor declared at the outset of the Covid-19 crisis: ‘Whatever extra resources our NHS needs to cope with Covid-19, it will get … whatever it needs, whatever it costs, we stand behind our NHS’.) The prime minister has rejected any return to the sort of austerity measures introduced in the wake of the financial crisis. The chancellor will need to announce hefty increases in taxation in the medium term to reduce the growth of borrowing. The government’s ability to increase taxation may be constrained by its 2019 election manifesto promise that it would not increase the headline rates of income tax, national insurance or VAT.
Economic shocks
The economy suffered simultaneous aggregate supply and aggregate demand shocks because of the lockdown imposed by the government on 23 March 2020 to curb the spread of the pandemic. Aggregate supply was constricted by the lockdown restrictions, particularly affecting the services sector, which accounts for 80% of the UK’s GDP. Aggregate demand was constrained by loss of income among the unemployed and those placed on furlough, leading to reduced spending on goods and consumer services. Falling business confidence and economic prospects led to a reduction in investment.
The precise impact of the economic shocks during the crisis won’t be known for some time but it has been estimated that the UK has already lost the equivalent of 17 years’ worth of annual economic growth. The economy shrank by 20.4% in the second quarter of 2020. The Bank of England has revised its earlier forecast that the economy would shrink by some 14% this year. It now believes that the economy will fall by 9.5% but that it will take longer to recover. Businesses were struggling even before the government’s recent announcement of new nationwide and local measures stretching into next spring because of the resurgence in Covid-19 reinfection rates. IHT Markit’s purchasing managers’ index shows that the growth in the services and manufacturing sectors began to flag in September; one in six of all businesses are still closed and one in eight of all workers are on furlough.
The government’s ‘eat out to help out’ scheme provided a temporary boost to the hospitality sector. The government’s introduction of a 10pm curfew on restaurants and pubs, and the reversal of its policy of encouraging workers to stop working from home to rejuvenate city centres, could have knocked the economy into a tailspin but for the chancellor’s announcement of a new job support scheme and other measures to support beleaguered businesses. But the economy won’t be able to recover fully until ministers begin to focus restrictions primarily on those who are most vulnerable, namely the elderly, those with underlying medical conditions and other high-risk groups and allow other people to carry on as usual provided that they take sensible precautions. Blanket restrictions tend to impede social interaction and economic activity. They risk causing long-term scarring to the economy that could threaten future prosperity.
Business expectations and confidence have been severely dented by the coronavirus. They are unlikely to revive simply because the government is exhorting consumers to increase their expenditure and telling businesses to reopen. The government has also urged people to return to work, hoping to help city centre businesses that have suffered from a significant drop in footfall. The speed of the economy’s recovery will depend on businesses having confidence that they can operate normally; that the government will handle a second wave of the virus more effectively than it did the first; and that government policy will provide businesses with the scope and support they need for future growth.
Ministers are trumpeting every bit of good news about the recovery in an attempt to revive the ‘animal spirits’ of businesses. But business expectations and confidence are unlikely to revive simply because the government is exhorting consumers to increase their expenditures, and businesses to reopen their doors. Businesses need confidence that they can operate normally; that government policy will provide stability and the support they need for future growth. Instead, they have faced chopping and changing in government policy and the imposition of fresh constraints because of the resurgence of the pandemic.
It will be necessary for the government to adopt expansionary fiscal policies to increase, and then, to maintain aggregate demand. It has provided income support to workers and loans to businesses. It has also strengthened the social safety net for those who have lost their jobs. Industries will recover at differential rates; some firms will falter, others may fail. The leisure, hospitality and consumer services sectors were hit the hardest by the restrictions. They won’t be able to recover fully until most of the rules on social distancing are removed. High street retailers have not been able to reverse the shift towards online shopping during the lockdown that have left city centres resembling ghost towns.
The government’s rhetoric has stressed that ‘we’re all in it together’, but the reality is that poor people have been hit the hardest by the crisis. The pandemic has accentuated the inequality fostered by globalisation and the financial crisis. For example, the closure of the state school system for six months, other than to the children of essential workers and vulnerable children, has widened the gap between the future prospects of children of the more affluent, many of whom are privately educated, and the majority, who attend state schools.
Most of those who have had to continue working on the frontline of the pandemic are employed in essential services such as public transport, supermarkets, waste disposal, security, and healthcare and postal services. Low-paid workers tend to have less secure jobs and are treated as expendable because of the relatively plentiful supply of lower-skilled workers. They are more likely to have been dismissed than to have been put on furlough.
The government is attempting to avert the growth of unemployment, to prevent hardship and to give consumers the confidence to spend, rather than to save. The Bank of England has forecast that the unemployment rate will practically double to 7.5% by the end of next year, expecting the level of unemployment to rise to 2.5m; other forecasters have said that it could exceed 3m. Some 300,000 employees have told the Office of National Statistics that they were temporarily off work without pay. Many unemployed workers have withdrawn from the labour market.
The chancellor has warned that many more jobs will go in the coming months. The economy is operating well below capacity and there is a widening gap between the actual and potential output of the economy. The lessons from past recessions suggest that if the rate of unemployment reaches 10% or higher, it could be seven years before it returns to its former level.
Younger workers are disproportionately represented among those who have been made unemployed. The number of those under the age of 25 years in receipt of universal credit has almost doubled to 538,000. The Resolution Foundation has predicted that youth unemployment could increase from its current level of about 400,000 to a million, because they are likely to be first in line to be dismissed. The 800,000 young people expected to enter the labour market during the year are likely to face reduced pay and limited prospects for years to come. The government has launched a new youth employment scheme. Employers who offer under-25s work placements under the ‘Kickstart’ scheme will be offered reimbursement for their minimum wages, NICs and pension contributions.
There has been a large increase in the number of people claiming universal credit during the pandemic. The government has temporarily increased basic universal credit and tax credit payments by £20 a week during the crisis, but this increase reverses only about a quarter of the value of the cuts in benefits during David Cameron’s premiership. There is a strong case for the temporary increase to be made permanent to protect claimants’ living standards, as well as for a reduction in the claw-back of benefits when a claimant’s earnings or working hours increase beyond a certain level to give them a greater incentive to go to work.
The increase in poverty, health, and social problems caused by the rise in unemployment will add to the direct medical impact of the coronavirus. Past experience suggests that an increase in the rate of unemployment leads to a rise in chronic diseases, including mental health problems. The suffering and hardship suffered by those who lose their jobs is unquantifiable.
Job retention schemes
At the peak of the crisis, there were 9.6m workers on furlough. It is estimated that about two-thirds of them have returned to work. The employers of some of these workers have voluntarily repaid the support they received because they have weathered the crisis, and are confident about their future profitability. But other employers have started to issue statutory notices of redundancy to their workers on furlough because they have had to contribute 20% of their furloughed workers’ pay from October 2020. There is anecdotal evidence that some large businesses placed staff whose jobs were unviable on furlough at the taxpayers’ expense to avoid reputational damage by declaring them redundant in the middle of the pandemic.
The chancellor has resisted pressure to extend the job retention scheme beyond the end of October, even for workers in the most vulnerable sectors. He has said that it would be ‘wrong to keep people trapped’ in a situation where they had no jobs to which they could return; that the government’s focus was on training, skills and new jobs. But on 24 September 2020, he succumbed to pressure from businesses and unions and announced the introduction of a new wage subsidy scheme because of concerns about the economic impact of the fresh curbs introduced to reduce Covid-19 reinfection rates, and the expected increase in unemployment when the job furlough scheme comes to an end. His winter economic plan also announced the extension of the application and repayment deadlines for the government-backed business loan schemes; the continuation of the self-employed income support scheme until the end of January 2021; and retention of the 5% reduced rate of VAT for hospitality businesses until the end of March.
The new job support scheme is designed to preserve ‘viable’ jobs that might otherwise have been lost when the job furlough scheme ends. It is modelled on the German system of Kurzarbeit, which compensates employees when they work fewer hours. The Treasury estimates that the new measure will cost £300m a month for every million workers on the scheme; and that it might provide support to between two to five million workers. (The scheme is not confined to workers who have previously been on furlough.) All small and medium-sized businesses will eligible to apply for the new job scheme from the beginning of November 2020 for a period of six months. Larger businesses will have to demonstrate that their turnover was adversely affected by the pandemic to access the scheme, and have to agree not to pay dividends or engage in share buy-backs for the duration.
Under the scheme, employers would need to engage workers for at least a third of their pre-Covid-19 hours and pay them for the time they work. The employer and the government will then share the cost of paying the remaining two-thirds of the workers’ wages on an equal basis, but the government’s contribution will be capped at just under £700 of the wages paid. (The government currently pays 80% of wages of those on furlough up to a maximum of £30,000.) Employers will have to contribute 55% of the wage costs of those who work for 33% of their normal hours.
The main advantage of the new scheme is that workers will cease to receive support to remain idle, and that it will cost the government considerably less than the furlough scheme. But it is debatable whether the new scheme will significantly avert the massive growth in joblessness likely to result when the job furlough scheme ends. Employers with staff currently on furlough would be better off retaining a single full-time employee rather than enrolling three part-time workers in the new scheme. Employers may simply choose to cut staff hours without using the scheme to avoid paying them for more than they work. The government could encourage businesses to their retain employees by increasing the amount of the employment allowance, which reduces the NICs cost of employment for small businesses. The alternative approach, of temporarily reducing the rate of employer NICs for all employers, would be considerably more expensive, and largely deadweight expenditure.
Wider impacts
Thanks to the financial measures hastily introduced by the government, the physical infrastructure of the economy was left practically untouched by the crisis; the financial system also emerged intact from the lockdown. The crisis has accelerated digital transformation by promoting remote working, and the diversification of supply chains. But the most profound impacts of the pandemic have been on the population – the human capital of the economy. The damage to its human capital, including unemployment, the enforced closure of schools, and the delays to the treatment of non-coronavirus medical conditions could scar some people and their families for the rest of their lives. There is little data about the long-term impact of the virus on those who suffered the most serious symptoms.
The government’s initial fiscal response was to bolster funding for the NHS. It also provided income support to those who had lost their livelihoods and supported businesses. It has spent £35.4bn on the job retention scheme, and it provided income support to 2.7m self-employed people at a cost of £7.8bn. It has also provided liquidity to cash-starved businesses by deferring tax payments, making grants to small businesses, and guaranteeing bank loans (see below). Fiscal policy will continue to play a crucial role in the UK’s economic recovery.
The government decided against boosting consumer spending by cutting the rate of VAT on all goods and services, as the Labour government had done in 2008 in the immediate aftermath of the financial crisis. It chose, instead, to reduce VAT from 20% to 5% until January 2021 for restaurants, hotels and cinemas, and introduced a month-long ‘eat out to help out’ scheme to encourage customers to return to restaurants.
Monetary policies implemented by the operationally independent Bank of England were a key aspect of the macroeconomic response during the pandemic. The Bank of England reduced the interest rate to 0.1% at an early stage in the crisis, while governor Andrew Bailey has boasted about going ‘big and fast’ with quantitative easing, i.e. the purchase of gilt-edged securities through open market operations to increase liquidity in the economy. The Bank also purchased commercial paper issued by large corporations under the coronavirus corporate financing facility to provide support to the largest businesses.
Economic strategy
The government has incurred an unprecedented amount of debt to fund the measures introduced to curb the pandemic. In May 2020, a leaked Treasury report published in The Daily Telegraph revealed that its (then) worst-case scenario was a deficit of £516bn. The figure was almost ten times that forecast in the March 2020 Budget, and treble that seen after the financial crash in 2007/08. The Treasury warned that the government’s borrowing requirements could ‘lead to a liquidity crisis and, ultimately, a sovereign debt crisis. A comparable UK scenario would be market conditions in 1976 ahead of the IMF loan when high and volatile inflation led to a loss of macro strategy credibility and a reluctance to hold UK debt.’ (The fact that the government did not challenge the veracity of the document, or launch a leak inquiry, suggests that it was deliberately made public.)
The Treasury warned ministers that the government might need to increase taxation by between £25bn and £30bn a year (equivalent to an increase in the basic rate of income tax from 20% to 25%) to fund the increased debt, stating that the government might need to break its 2019 general election manifesto promise not to increase the headline tax rates of income tax, national insurance and VAT. It advised ministers to increase corporation tax and to consider introducing novel taxes, such as a carbon tax or a levy to fund increased expenditure on the NHS and social care. Abandoning the government’s commitment to the ‘triple-lock’ on state pensions, for example, would save £8bn a year (the cost of state pensions could increase significantly if prices and earnings rise sharply during or after the economic recovery); while the imposition of a two-year freeze over public sector pay would also save billions.
The chancellor has understandably refused to rule out tax increases and public spending cuts, but it has been reported that the prime minister has overruled the chancellor’s wish to suspend the pensions triple-lock on the grounds that it would antagonise working age taxpayers by giving pensioners preferential treatment when we are all supposed to be in it together.
Government debt has risen to over £2 trillion, the first time it has exceeded the GDP since the early sixties. The government has borrowed £221.2bn in the first five months of the financial year. There has been a decline in VAT, corporation tax, and income tax and NICs receipts. The Office of Budget Responsibility had forecast in March 2020 that the government would have to borrow about £175bn for the whole of 2020/21. But the Financial Times has estimated that the total level of borrowing for the year could be as high as £400bn.
The government has increased expenditure on the NHS, testing and tracing and vaccines; deferred the collection of tax revenues; provided additional support for individuals and businesses during the pandemic. It is also expected to suffer substantial but as yet unquantified losses on the business loans it has guaranteed (which are interest-free during the first year); the measures in the Treasury’s winter economic plan are expected to cost £10bn. The government’s borrowing could amount to more than twice its requirement during the previous high point, during the financial crisis (2009/10).
But the government is practically flush with funds. The Bank of England has granted it an overdraft of £400bn. The Treasury’s Debt Management Office (TDMO) is borrowing unprecedentedly large sums of money every month without difficulty. The government is spending significantly less on servicing the debt than the Treasury estimated it would have to do. A substantial proportion of the interest on government debt is being paid to the Bank of England itself because of its programme of quantitative easing (QE) ’to calm markets and to keep inflation on track…in terms of smoothing the profile of government borrowing and the impact it might have on financial markets’.
The Bank has purchased a total of £310bn of gilt-edged securities during the crisis from discount houses, and from the banks, pension funds and insurance companies that hold them as reserve assets. Taken together with the gilts it purchased in the financial crisis, the Bank now holds £745bn of the total public debt. The Bank’s purchase of government debt at commercial prices from discount houses, banks and insurance companies was a less inflationary course than printing money or directly purchasing debt from the government. The future cost of servicing government debt has declined, and the TDMO has also been able to extend the maturity of government debt.
The current demand for gilts is so strong that the governor of the Bank told a parliamentary committee that, for the first time in its history, it was considering the use of negative interest rates. Investors in government bonds effectively paid to lend money to the UK government when the interest rate in a gilts auction fell below zero for the first time. The public debate presently underway between some members of the Bank’s rate-setting monetary policy committee and its deputy governors about whether it should adopt negative interest rates has led to mixed messages about the Bank’s intentions; it risks causing instability in the financial markets. The pricing in futures markets is increasingly predicated on the assumption of negative interest rates next year, and rates below 1% until 2025. The policy would have only limited effectiveness in encouraging increased spending and investment in the long-term, and it would discourage businesses from maintaining reserves for future contingencies. Negative interest rates would also penalise the thrifty, particularly those who rely on their income from savings to supplement their meagre pensions or earnings.
The UK government is attempting to revive the economy and to increase employment to the point where the price level starts rising and the Bank has to begin to increase interest rates off the floor. The Bank could then begin unwinding its asset purchases, and be able to increase interest rates to counter a surge in inflation. The governor of the Bank has said that it would need to create enough ‘headroom’ before it could intervene with another rapid burst of QE in the event of another crisis. Its holdings of gilts currently amount to about 34% of GDP, a lower proportion of government debt holdings than held by the European Central Bank or the US Federal Reserve.
Mr Sunak is likely to publish a fiscal rule to set out the parameters for the government’s future spending and borrowing. His promulgation of a rule, however loose, to bring down the level of debt after the pandemic subsides would reassure future investors in public debt that the government would maintain fiscal discipline to avoid inflation. Taxes will be increased to fund expenditure and repay public debt, but only after the economy has recovered and the country returned to prosperity.
Impact of job retention schemes on employment
The job retention and the self-employed income support schemes, along with government-backed loans, have cushioned the impact of the slump. They have preserved jobs and businesses in the short term. While the wider long-term impact of these schemes has still to be assessed, it is clear that they will not in themselves encourage economic recovery. It is inevitable that some businesses will falter when they come out of suspended animation, particularly if they lacked reserves before the lockdown; some firms might go out of business. The job retention scheme gave businesses an opportunity to delay changes which might have been vital for their survival. It has delayed the unemployment resulting from such changes, not obviated them.
Workers on furlough will only be able to return to work if their employers want them back. Some of them may not be keen to rush back to work after being paid for so long not to do so: the furlough might have eroded their work ethic.
Workers will need to seek other jobs if their employer ceases trading, and so may need to retrain. The government missed an opportunity to help employees enhance their skills while on furlough. It could have offered them incentives to undertake online courses to learn new skills, such as coding or new languages, and enhance their employability, rather than paying them to sit at home.
Many, perhaps most, of the workers still on furlough are from the hospitality and leisure sectors. The businesses in these sectors were devastated by original lockdown. They found it hard to recover when the restrictions were eased because of the introduction of rules on social distancing. They are unlikely to be able to afford to pay their workers, even on a part-time basis. The curfew introduced following the resurgence of Covid-19 has clouded over the ray of optimism created by the month-long ‘eat out to help out’ scheme.
The most effective way to encourage businesses to retain their existing workers (or hire more of them) would be to increase aggregate demand and to reduce the cost of employing staff. But the government was so concerned about the number of job losses that it offered employers an incentive of £1,000 per worker if they retain staff previously on furlough until the end of the year. The incentive is largely deadweight because businesses will only retain the workers they need; at £1,000, the payment is not a sufficient inducement to retain workers for whom they no longer have any commercial requirement.
Jim Harra, the chief executive of HMRC, wrote to the chancellor on 7 July to ask for a formal instruction to implement these proposals. He said that, as HMRC’s principal accounting officer, he was obliged to make sure that his department’s use of its resources was appropriate and consistent with the Treasury’s guidance to departments on the need to ensure value for money. He said that the efficiency of the measure was ‘currently highly uncertain’.
Despite the Bank’s relative optimism about a rapid economic recovery, there are a number of factors that will militate against it.
The curbs introduced by the government following the increase in the number of daily infections from the virus has led to fears that it might lock down the economy again to suppress the spread of Covid-19. The government’s failure to establish an effective system for ‘testing, tracking and tracing’ those who have been infected and their contacts and the lack of an effective vaccine have led to fears about further waves of the virus.
The UK’s low productivity growth vis-à-vis its principal trading partners was the biggest challenge facing the economy before the coronavirus. The economic lockdown has intensified the underlying problems that since the financial crisis in 2008 have caused economic growth to falter and held back any sustained improvement in living standards.
Productivity growth is fuelled by investment, innovation and improvements to the skills of the workforce, all of which have been dented by the crisis. The productivity shortfall will persist despite the temporary upsurge in economic growth in the early stages of the recovery, as firms deal with pent-up demand and shed staff who had been sheltered by the job retention scheme.
Increasing expenditure on research and development (R&D) that the government directly funds, enhancing tax incentives to companies that undertake such activities, and retraining workers would stimulate innovation, productivity and economic growth, and create spillover benefits for businesses throughout the economy. The government’s proposed introduction of a ‘lifetime skills guarantee’ could reverse the underfunding of technical further education, and expand the supply of skilled workers that has contributed to the UK’s chronically low productivity. It would be expensive to increase the availability and accessibility of high quality vocational training for the workforce but the investment would be repaid many times over through their enhanced productivity and higher economic growth.
The chancellor can highlight his commitment to boosting productivity growth by reiterating the encouraging announcements he made about increasing support for R&D activity in his first budget, which was blown off course by the pandemic. The government could also announce increased investment into researching medical drugs and health care systems; and investment into R&D to tackle other future risks, notably those posed by climate change.
The government could achieve a step change in R&D by launching a wide-ranging consultation into how to widen and increase tax relief for R&D expenditure by businesses, particularly in intangible assets and human capital. There is a strong case for the government to support university R&D activities that are now threatened by the collapse in their fee income from overseas students; universities make a vast contribution to R&D and are, for example, in the forefront of the search for a vaccine for the coronavirus.
The government could take advantage of historically low interest rates to fund direct government investment on capital infrastructure projects, such as improvements to the UK’s broadband coverage throughout the country. (The UK ranks 47th in the world for internet speed.) Such expenditure would generate a cumulative return that would exceed the liabilities incurred by the government. The City is likely to be more supportive of government borrowing to fund capital spending on such projects than political vanity projects such as HS2 or the construction of a bridge between Scotland and Northern Ireland. (Boris Johnson mooted the idea when he was foreign secretary, and he has directed officials to investigate its feasibility and cost since becoming the prime minister.)
This would add to the business and economic upheaval caused by the coronavirus. Well-informed commentators have said that an agreement is within ‘touching distance’. But if isn’t, the imposition of tariffs on trade between the UK and the EU would dampen growth in the UK to a greater extent than it would affect the EU. There would also be considerably more cost and bureaucracy for businesses that trade with the EU (the government is helping businesses to hire and train 50,000 customs staff).
The Cabinet Office has prepared contingency plans to deal with the risk of the UK exiting the EU without a trade deal coinciding with a second wave of Covid-19 infections. These include strategies to mitigate the risks posed by the shortage of vital supplies, including the use of the army to police public disorder in case of food shortages, and the deployment of the Royal Navy to prevent EU vessels illegally intruding into UK fishery waters.
To ensure continuity of essential medical supplies, the government has asked the pharmaceutical industry to stockpile at least six weeks of stock on UK soil. The crisis has reduced the financial ability of some businesses to build up stockpiles to mitigate the risk of severe delays to their supplies.
The government has deferred the collection of substantial tax receipts, and persuaded lenders to allow borrowers to delay the payment of mortgage payments and credit card bills. The government has, through the British Business Bank, guaranteed loans amounting to £57bn to businesses.
There is a qualitative difference between the credit worthiness of the different types of government-supported loans made during the crisis. The short-term loans made by the Bank of England under its corporate financing facility are probably the least risky (they accounted for much of the government-guaranteed lending), because it provided the facility in return for short-term commercial paper from the companies.
The government has guaranteed 80% of the value of the business interruption loans made by commercial banks aimed at SMEs with a turnover of up to £45m (total value of loans: £15.5bn), and at larger businesses with a turnover of up to £200m (total value of loans: £3.8bn). The banks went through their normal lending procedures, and asked for financial accounts, business plans, and cash flow projections before they granted these loans. They also asked for collateral for the full value of the loans until the government prohibited them from seeking security for the proportion of the loans guaranteed.
The loans made by the banks under the bounce back loan scheme are less creditworthy. The government has fully indemnified banks against the risk of default by borrowers to ensure that they received funding with minimum of ‘banking bureaucracy’. They have been extended to the smallest businesses with only the most basic checks, and without investigating the creditworthiness of the borrowers and the purpose to which they were to be applied. Most of these businesses would have found it difficult, if not impossible, to borrow from banks under normal commercial terms.
There is anecdotal evidence of fraudulent applications for bounce back loans. It is not clear if the banks regard themselves as responsible for investigating such illegal activity. (HMRC has already started investigating false applications for the job retention schemes and claims of non-compliance with its rules by employers.)
The commercial banks will vigorously pursue those who default on business interruption loans because they are the beneficial owners of 20% of the debt. But they will have no comparable incentive to chase up borrowers who default on bounce back loans. There is no requirement to pay interest or repayments during the first 12 months of the bounce back loans. The spectre of unpaid debt that was hanging over the small businesses that have taken out these loans has been lifted by the chancellor’s announcement that the repayment period for their repayment period has been extended from six years to ten, and they will have more flexible ‘pay as you grow’ repayment schedules.
There have been of warnings that up to half the £38bn loaned to the 1.26m borrowers of such loans are unlikely to be ever repaid. Some borrowers may be unable to meet their monthly repayment installments despite the breathing space provided by the extension of their loans. If the lenders are responsible for chasing delinquent borrowers, it is unclear how they would be reimbursed for the cost of collecting the debt from recalcitrant borrowers. The government would have to bear the full political cost of any such action. The government has mitigated the risk of large numbers of small businesses being pursued through the courts for their failure to meet the monthly repayments on their bounce back loans in the run-up to the next election. The value of the debt written off as irrecoverable would have to be treated as public expenditure.
In contrast, however, the government is expected to make a handsome net profit from the £720m it has invested in the more than 700 fast-growing high-tech businesses. The investments were made through its future fund to drive forward research and development. Most of these companies are loss-makers at present, but many are expected to make breakthroughs that could make them extremely valuable.
Under the terms of the scheme, the government’s funding had to be matched by the original investors, and it had to be granted the right to convert its support into equity at a discount in three years’ time. The government’s shareholdings in these companies will probably be sold to hedge funds; the chancellor has made it clear that he does not want the Treasury to end up with a minority interest in lots of small companies.
This would involve a chronic lack of aggregate demand leading to a permanent decline in economic activity and employment. Aggregate demand will fall if households respond to the crisis by permanently increasing their savings ratio as a precautionary measure against future crises. The more people save, the less they have available for consumer expenditure. Fear of unemployment and loss of confidence about the future have caused households to reduce debt and increase savings by curbing their consumer spending. Private investment has also declined because of the loss of business confidence.
The crisis has intensified the financial risks faced by poorer households; many are on benefits or in insecure low-paid or part-time roles, and some of them went into the crisis with debt problems. But higher income households have reduced their spending by more than the fall in their incomes. Some taxpayers with high incomes have already had to increase their personal savings to achieve their target post-retirement incomes because of the reduction in the value of their pension funds.
Low interest rates, the job retention scheme, business grants and the ready availability of government-guaranteed loans have encouraged the growth of ‘zombie companies’. Such businesses would, in normal times, be unable to cover their debt-servicing costs from their operating profits. Government bailouts have enabled businesses that were struggling before the pandemic struck to saddle themselves with levels of debt that they would not have been able to obtain on commercial terms. Such companies have been kept in business solely by public funding to preserve their employees’ jobs, sapping the economy of dynamism and slowing economic growth.
Although the economy is operating well below capacity at present, there are signs of incipient inflation because of the massive fiscal and monetary expansion in the economy. The Bank of England’s inflation target for the year is 2%. The consumer price index increased by 1%; the retail prices index rose by 1.6% in the same period. These indicators are likely to dip in the coming months to reflect the government’s temporary cut in VAT for hospitality, accommodation and tourist attractions, and its month-long restaurant discount scheme.
But factors such as social distancing and the cost of personal protective equipment have led to a cost-push increase in the price of services, as businesses attempt to pass on their increased operating costs to customers. There are also signs of demand-pull inflationary tendencies; e.g. the rise in plane fares to countries not included in the government’s quarantine list. The recent jump in the price of gold has led some commentators to suggest that investors are doubtful about whether the low and stable level of inflation in the UK and other advanced economies over the past decade is likely to persist.
The government’s largesse in the form of increased public spending and its facilitation of substantial bank lending have injected vast purchasing power into the economy that will directly raise the broader measures of money and spur an increase in the price level. There could be a surge in inflation of up to 10% in 2021/22, as is usual in the aftermath of wars. However, the impact of such inflation is likely to be mitigated by the length of time it takes to tame Covid-19.
The government would tacitly welcome the return of inflation that would accompany the restoration and growth of economic activity. It would increase tax revenues through ‘fiscal drag’, reduce the real value of its borrowing requirements, and erode the value of public debt. But the return of inflation could also trigger demands for higher wages, particularly if the government succeeds in reversing the growth in unemployment and the labour market begins to tighten. A rise in inflation would be tantamount to an arbitrary tax on those living on un-indexed fixed incomes, debtors, and those holding cash balances.
The Tory party made ambitious promises to ‘level up’ the areas where its so-called ‘red wall’ parliamentary constituencies are located, but the crisis has limited the scope for the wholesale transformation of the economy. There is a risk of widespread unemployment in these regions. Many older and less productive businesses are located there, and are expected to suffer the most from the UK leaving the EU without a deal.
Once the government is free of EU state aid rules after the end of the year, it will come under pressure to subsidise struggling businesses to protect jobs for electoral reasons. The government might be tempted to use its ‘Project Birch’ scheme to provide funding to large companies in the older heavy manufacturing industries; many have seen their markets collapse during the pandemic. Project Birch is intended to protect ‘strategically important’ companies whose failure would ‘disproportionately harm the economy’. But the criteria for establishing which companies should receive special treatment are likely to be drawn widely to allow ministers to retain flexibility.
Without greater transparency about these rules, there is a risk that the scheme could degenerate into a 1970s-style mechanism for allowing the government to rescue ‘lame ducks’.
Future tax strategy
Given the current level of public debt and uncertainty about the timing and path of the recovery of the economy, we shall in the medium to long-term almost certainly have to live with both higher public debt and higher taxation. The government is unlikely to break its totemic 2019 election manifesto commitment not to increase the headline rates of income tax, national insurance and VAT, at least in the short term.
There needs to be a public debate about the adequacy of public services following the long period of austerity, and how and by whom the increased public expenditure and the increased public debt created during the crisis should be paid. The government will not be able to keep borrowing indefinitely. There is limited scope to reduce public expenditure. Taxes will have to rise. It is naive to argue that the solution lies solely in taxing ‘the wealthy’ (the top 1% of taxpayers already pay over a quarter of all income tax) and ‘closing down tax avoidance’.
There has been considerable speculation about how the chancellor might increase taxation. ‘kite-flying’ by political special advisers to test the reaction to possible measures has led to headlines about imminent increases in taxation. Most of the measures discussed in the media are routinely included in the list of potential revenue-raisers that HMRC and the Treasury provide to the chancellor in the run-up to fiscal events. Such lists invariably begin by reminding ministers that the fairest and most effective way of raising additional revenue would be to increase the existing rates of income tax or to introduce new additional rates of income tax for those who receive higher incomes. The other measures that would be included in such advice are likely to include:
The government is under considerable pressure to reform the system because the crisis has made the chronic problems of the sector more acute. Boris Johnson promised in the 2019 general election to ‘fix’ social care funding, so that the elderly would not need to sell their homes to pay for their care. His government has yet to come up with any specific proposals.
A growing proportion of health service costs are devoted to addressing the medical needs of the rapidly growing number of older members of the population. The demands of health care for the elderly are intertwined with the challenges of social care. The distinction between health and social care has been a barrier to the design of effective policy.
The biggest problem with fixing social care has been how to fund the necessary public expenditure. The government could follow the example set by the Labour Party in 2002, and announce a 1% increase in NICs for the specific purpose of paying for social care. The Labour Party was initially criticised for breaking its manifesto pledge not to increase taxation, but the measure eventually gained public support. However, the government would be hard-pushed to develop, consult on, and begin the implementation of its proposals before the country is in the run-up to the next election.
The government could also announce that those over the state pension age and still employed or self-employed would cease to be exempt from NICs on their earnings. The change is necessary to avoid the intergenerational tension that might result from the rapidly rising dependency of older citizens on the working age population for the payment of their pensions. But the influence of the ‘grey vote’ might make the government wary of risking a row with its own backbenchers.
When the chancellor announced the SEISS in March 2020, he said that it was hard to justify the fact that the self-employed pay lower NICs than employees. It remains to be seen if Tory backbenchers allow him to revive former chancellor Philip Hammond’s attempt to reduce the gap between the NICs paid by the self-employed and employees. To allay the opposition to the change within the Conservative party, the reform could be phased in over two to three years. The government could also sweeten the change by granting the self-employed entitlement to statutory maternity relief and statutory sick pay.
The chancellor denied some 2m company directors, who are owners of incorporated small businesses, income support on the dividend element of their income under the job retention scheme.
The changes introduced to dividend taxation in 2016 redressed much of the imbalance between the taxation of dividends paid in lieu of remuneration, compared to profits that are directly earned by self-employed individuals. But people with exceptionally high personal incomes, such as successful actors, sportsmen, and entertainers, have continued to incorporate companies to receive their business and non-employment income to reduce their liability to income tax.
Treating income arising from similar economic activities in different ways, depending on the business form they choose to adopt violates the principle of adopting a neutral tax treatment across business forms. Allowing the practice to continue is distortionary and inefficient, and it leads to the misallocation of resources. The most direct way to prevent small companies from being used for tax avoidance or tax deferral is to legislate to make companies that are, say, controlled by five or fewer individuals or persons connected with them, “fiscally transparent”; or, alternatively, to make such companies’ profits liable to income tax rather than corporation tax.
The chancellor’s decision to ask the OTS to review CGT is not a harbinger of an increase in the rate at which it is charged. The current rate was set a level that maximises the yield. Ministers have repeatedly been advised to consider the abolition or restriction of the current exemption for gains from the disposal of a taxpayer’s principal private residence but have consistently rejected the option.
The exemption is a popular perk for middle class taxpayers, but there is a strong case for restricting either the number of times the relief can be claimed, or placing a limit of say, £500,000, on the amount of the exemption from such chargeable gains.
The chancellor would be able to increase tax revenues by up to £10bn a year by restricting the availability of tax relief on pension contributions to the basic rate of income tax. He could do so on a phased basis, to avoid disadvantaging those who are within, say, five years of reaching the state retirement age.
He could also use some of the revenue to address a pensions anomaly in the tax system that adversely impacts 1.7m low-income workers (mostly women) who earn below or just above the personal income tax allowance. They do not receive tax relief on some or all of their contributions, because their employer’s pension scheme uses net pay arrangements, making their pension saving up to 25% more expensive compared to workers whose employers use relief at source arrangements. The Treasury is currently conducting a review into this, as promised in its 2019 general election manifesto.
The incidence of Covid-19 has highlighted the risks from obesity and diabetes. The prime minister has blamed his then weight for making him vulnerable to the virus, and embarked on a public attempt to lose weight. The government could introduce a measure to encourage food manufacturers to reduce the fat content of processed foods, following the relative success of the soft drinks industry levy (2018). It would not raise significant revenue, but it would earn political kudos for the government from medical professionals.
The UK has experienced a significant reduction in greenhouse emissions during the lockdown because of the reduction in traffic and economic activity. But carbon dioxide levels will increase as soon as the economy returns to normal. It is government policy to replace vehicles that currently operate on petrol and diesel with fully electric cars to reduce greenhouse gas emissions. The previous government announced that the sale of cars with combustion engines would end in 2040. There is a consultation currently underway that could result in ministers bringing that date forward.
Successive governments have frozen fuel duty since 2010, a policy that flies in the face of their stated environmental objectives. The price of petrol and fuel has fallen in real terms, while the cost of public transport has risen faster than the rate of inflation. The government could enhance the credibility of its wider environmental policies by increasing fuel duty on an annual basis, and by introducing a ‘car scrappage’ scheme similar to the one implemented in 2009 to give people an incentive to trade in older vehicles for electric cars.
There has been a renewed interest in the introduction of a wealth tax during the pandemic. The introduction of an annual wealth tax would help to mitigate the economic, social and political risks posed by wealth inequality. However, it would be electoral suicide for a Tory government to propose, let alone introduce, such a measure, outraging its wealthy donors and supporters. Even the new leader of the Labour Party, which attempted to introduce a wealth tax when it was in government in 1974, seems to have politically distanced himself from the policy.
The government has relied primarily on borrowing rather than taxation to fund its increased expenditures during the Covid-19 pandemic. It will continue to do so until the economy has recovered, because any premature increase in taxation could jeopardise the nascent recovery. It is currently able to meet its funding requirements through borrowing at a modest cost, but it will need to increase taxation to repay public debt and to fund its ambitious manifesto commitments. The government will probably delay the implementation of any increase in taxation until the economy has securely recovered. Economic growth and inflation would help to reduce the burden of public debt and taxation.
Chancellor Rishi Sunak has warned of the ‘difficult decisions’ that lie ahead following the cancellation of his planned autumn statement and the publication of his winter economic plan. The government will need to increase borrowing or taxation (or both) because the chancellor has said that that public spending will increase above inflation next year. He will need to outline how the government intends to reduce its reliance on borrowing and to begin repaying the debt that it has incurred in combatting Covid-19 at Budget 2021 to maintain confidence in the government’s ability to manage the economy. While the government is currently able to meet its borrowing requirements, the financial markets will begin to become increasingly restless unless the government announces a credible plan to reassert control over public finances.
The government will continue to use fiscal policy (namely, how much it spends, and how it finances that through taxation or borrowing or both) with supportive monetary policy from the Bank of England to avert job losses and to nurse the economy back to recovery. Fiscal policies have provided an emergency lifeline during the pandemic and will play an important role in the economic recovery.
Any premature increase in taxation in the short term could choke the economy while it is struggling to recover. The government has committed itself to increasing public expenditure on the health service and other measures. (The chancellor declared at the outset of the Covid-19 crisis: ‘Whatever extra resources our NHS needs to cope with Covid-19, it will get … whatever it needs, whatever it costs, we stand behind our NHS’.) The prime minister has rejected any return to the sort of austerity measures introduced in the wake of the financial crisis. The chancellor will need to announce hefty increases in taxation in the medium term to reduce the growth of borrowing. The government’s ability to increase taxation may be constrained by its 2019 election manifesto promise that it would not increase the headline rates of income tax, national insurance or VAT.
Economic shocks
The economy suffered simultaneous aggregate supply and aggregate demand shocks because of the lockdown imposed by the government on 23 March 2020 to curb the spread of the pandemic. Aggregate supply was constricted by the lockdown restrictions, particularly affecting the services sector, which accounts for 80% of the UK’s GDP. Aggregate demand was constrained by loss of income among the unemployed and those placed on furlough, leading to reduced spending on goods and consumer services. Falling business confidence and economic prospects led to a reduction in investment.
The precise impact of the economic shocks during the crisis won’t be known for some time but it has been estimated that the UK has already lost the equivalent of 17 years’ worth of annual economic growth. The economy shrank by 20.4% in the second quarter of 2020. The Bank of England has revised its earlier forecast that the economy would shrink by some 14% this year. It now believes that the economy will fall by 9.5% but that it will take longer to recover. Businesses were struggling even before the government’s recent announcement of new nationwide and local measures stretching into next spring because of the resurgence in Covid-19 reinfection rates. IHT Markit’s purchasing managers’ index shows that the growth in the services and manufacturing sectors began to flag in September; one in six of all businesses are still closed and one in eight of all workers are on furlough.
The government’s ‘eat out to help out’ scheme provided a temporary boost to the hospitality sector. The government’s introduction of a 10pm curfew on restaurants and pubs, and the reversal of its policy of encouraging workers to stop working from home to rejuvenate city centres, could have knocked the economy into a tailspin but for the chancellor’s announcement of a new job support scheme and other measures to support beleaguered businesses. But the economy won’t be able to recover fully until ministers begin to focus restrictions primarily on those who are most vulnerable, namely the elderly, those with underlying medical conditions and other high-risk groups and allow other people to carry on as usual provided that they take sensible precautions. Blanket restrictions tend to impede social interaction and economic activity. They risk causing long-term scarring to the economy that could threaten future prosperity.
Business expectations and confidence have been severely dented by the coronavirus. They are unlikely to revive simply because the government is exhorting consumers to increase their expenditure and telling businesses to reopen. The government has also urged people to return to work, hoping to help city centre businesses that have suffered from a significant drop in footfall. The speed of the economy’s recovery will depend on businesses having confidence that they can operate normally; that the government will handle a second wave of the virus more effectively than it did the first; and that government policy will provide businesses with the scope and support they need for future growth.
Ministers are trumpeting every bit of good news about the recovery in an attempt to revive the ‘animal spirits’ of businesses. But business expectations and confidence are unlikely to revive simply because the government is exhorting consumers to increase their expenditures, and businesses to reopen their doors. Businesses need confidence that they can operate normally; that government policy will provide stability and the support they need for future growth. Instead, they have faced chopping and changing in government policy and the imposition of fresh constraints because of the resurgence of the pandemic.
It will be necessary for the government to adopt expansionary fiscal policies to increase, and then, to maintain aggregate demand. It has provided income support to workers and loans to businesses. It has also strengthened the social safety net for those who have lost their jobs. Industries will recover at differential rates; some firms will falter, others may fail. The leisure, hospitality and consumer services sectors were hit the hardest by the restrictions. They won’t be able to recover fully until most of the rules on social distancing are removed. High street retailers have not been able to reverse the shift towards online shopping during the lockdown that have left city centres resembling ghost towns.
The government’s rhetoric has stressed that ‘we’re all in it together’, but the reality is that poor people have been hit the hardest by the crisis. The pandemic has accentuated the inequality fostered by globalisation and the financial crisis. For example, the closure of the state school system for six months, other than to the children of essential workers and vulnerable children, has widened the gap between the future prospects of children of the more affluent, many of whom are privately educated, and the majority, who attend state schools.
Most of those who have had to continue working on the frontline of the pandemic are employed in essential services such as public transport, supermarkets, waste disposal, security, and healthcare and postal services. Low-paid workers tend to have less secure jobs and are treated as expendable because of the relatively plentiful supply of lower-skilled workers. They are more likely to have been dismissed than to have been put on furlough.
The government is attempting to avert the growth of unemployment, to prevent hardship and to give consumers the confidence to spend, rather than to save. The Bank of England has forecast that the unemployment rate will practically double to 7.5% by the end of next year, expecting the level of unemployment to rise to 2.5m; other forecasters have said that it could exceed 3m. Some 300,000 employees have told the Office of National Statistics that they were temporarily off work without pay. Many unemployed workers have withdrawn from the labour market.
The chancellor has warned that many more jobs will go in the coming months. The economy is operating well below capacity and there is a widening gap between the actual and potential output of the economy. The lessons from past recessions suggest that if the rate of unemployment reaches 10% or higher, it could be seven years before it returns to its former level.
Younger workers are disproportionately represented among those who have been made unemployed. The number of those under the age of 25 years in receipt of universal credit has almost doubled to 538,000. The Resolution Foundation has predicted that youth unemployment could increase from its current level of about 400,000 to a million, because they are likely to be first in line to be dismissed. The 800,000 young people expected to enter the labour market during the year are likely to face reduced pay and limited prospects for years to come. The government has launched a new youth employment scheme. Employers who offer under-25s work placements under the ‘Kickstart’ scheme will be offered reimbursement for their minimum wages, NICs and pension contributions.
There has been a large increase in the number of people claiming universal credit during the pandemic. The government has temporarily increased basic universal credit and tax credit payments by £20 a week during the crisis, but this increase reverses only about a quarter of the value of the cuts in benefits during David Cameron’s premiership. There is a strong case for the temporary increase to be made permanent to protect claimants’ living standards, as well as for a reduction in the claw-back of benefits when a claimant’s earnings or working hours increase beyond a certain level to give them a greater incentive to go to work.
The increase in poverty, health, and social problems caused by the rise in unemployment will add to the direct medical impact of the coronavirus. Past experience suggests that an increase in the rate of unemployment leads to a rise in chronic diseases, including mental health problems. The suffering and hardship suffered by those who lose their jobs is unquantifiable.
Job retention schemes
At the peak of the crisis, there were 9.6m workers on furlough. It is estimated that about two-thirds of them have returned to work. The employers of some of these workers have voluntarily repaid the support they received because they have weathered the crisis, and are confident about their future profitability. But other employers have started to issue statutory notices of redundancy to their workers on furlough because they have had to contribute 20% of their furloughed workers’ pay from October 2020. There is anecdotal evidence that some large businesses placed staff whose jobs were unviable on furlough at the taxpayers’ expense to avoid reputational damage by declaring them redundant in the middle of the pandemic.
The chancellor has resisted pressure to extend the job retention scheme beyond the end of October, even for workers in the most vulnerable sectors. He has said that it would be ‘wrong to keep people trapped’ in a situation where they had no jobs to which they could return; that the government’s focus was on training, skills and new jobs. But on 24 September 2020, he succumbed to pressure from businesses and unions and announced the introduction of a new wage subsidy scheme because of concerns about the economic impact of the fresh curbs introduced to reduce Covid-19 reinfection rates, and the expected increase in unemployment when the job furlough scheme comes to an end. His winter economic plan also announced the extension of the application and repayment deadlines for the government-backed business loan schemes; the continuation of the self-employed income support scheme until the end of January 2021; and retention of the 5% reduced rate of VAT for hospitality businesses until the end of March.
The new job support scheme is designed to preserve ‘viable’ jobs that might otherwise have been lost when the job furlough scheme ends. It is modelled on the German system of Kurzarbeit, which compensates employees when they work fewer hours. The Treasury estimates that the new measure will cost £300m a month for every million workers on the scheme; and that it might provide support to between two to five million workers. (The scheme is not confined to workers who have previously been on furlough.) All small and medium-sized businesses will eligible to apply for the new job scheme from the beginning of November 2020 for a period of six months. Larger businesses will have to demonstrate that their turnover was adversely affected by the pandemic to access the scheme, and have to agree not to pay dividends or engage in share buy-backs for the duration.
Under the scheme, employers would need to engage workers for at least a third of their pre-Covid-19 hours and pay them for the time they work. The employer and the government will then share the cost of paying the remaining two-thirds of the workers’ wages on an equal basis, but the government’s contribution will be capped at just under £700 of the wages paid. (The government currently pays 80% of wages of those on furlough up to a maximum of £30,000.) Employers will have to contribute 55% of the wage costs of those who work for 33% of their normal hours.
The main advantage of the new scheme is that workers will cease to receive support to remain idle, and that it will cost the government considerably less than the furlough scheme. But it is debatable whether the new scheme will significantly avert the massive growth in joblessness likely to result when the job furlough scheme ends. Employers with staff currently on furlough would be better off retaining a single full-time employee rather than enrolling three part-time workers in the new scheme. Employers may simply choose to cut staff hours without using the scheme to avoid paying them for more than they work. The government could encourage businesses to their retain employees by increasing the amount of the employment allowance, which reduces the NICs cost of employment for small businesses. The alternative approach, of temporarily reducing the rate of employer NICs for all employers, would be considerably more expensive, and largely deadweight expenditure.
Wider impacts
Thanks to the financial measures hastily introduced by the government, the physical infrastructure of the economy was left practically untouched by the crisis; the financial system also emerged intact from the lockdown. The crisis has accelerated digital transformation by promoting remote working, and the diversification of supply chains. But the most profound impacts of the pandemic have been on the population – the human capital of the economy. The damage to its human capital, including unemployment, the enforced closure of schools, and the delays to the treatment of non-coronavirus medical conditions could scar some people and their families for the rest of their lives. There is little data about the long-term impact of the virus on those who suffered the most serious symptoms.
The government’s initial fiscal response was to bolster funding for the NHS. It also provided income support to those who had lost their livelihoods and supported businesses. It has spent £35.4bn on the job retention scheme, and it provided income support to 2.7m self-employed people at a cost of £7.8bn. It has also provided liquidity to cash-starved businesses by deferring tax payments, making grants to small businesses, and guaranteeing bank loans (see below). Fiscal policy will continue to play a crucial role in the UK’s economic recovery.
The government decided against boosting consumer spending by cutting the rate of VAT on all goods and services, as the Labour government had done in 2008 in the immediate aftermath of the financial crisis. It chose, instead, to reduce VAT from 20% to 5% until January 2021 for restaurants, hotels and cinemas, and introduced a month-long ‘eat out to help out’ scheme to encourage customers to return to restaurants.
Monetary policies implemented by the operationally independent Bank of England were a key aspect of the macroeconomic response during the pandemic. The Bank of England reduced the interest rate to 0.1% at an early stage in the crisis, while governor Andrew Bailey has boasted about going ‘big and fast’ with quantitative easing, i.e. the purchase of gilt-edged securities through open market operations to increase liquidity in the economy. The Bank also purchased commercial paper issued by large corporations under the coronavirus corporate financing facility to provide support to the largest businesses.
Economic strategy
The government has incurred an unprecedented amount of debt to fund the measures introduced to curb the pandemic. In May 2020, a leaked Treasury report published in The Daily Telegraph revealed that its (then) worst-case scenario was a deficit of £516bn. The figure was almost ten times that forecast in the March 2020 Budget, and treble that seen after the financial crash in 2007/08. The Treasury warned that the government’s borrowing requirements could ‘lead to a liquidity crisis and, ultimately, a sovereign debt crisis. A comparable UK scenario would be market conditions in 1976 ahead of the IMF loan when high and volatile inflation led to a loss of macro strategy credibility and a reluctance to hold UK debt.’ (The fact that the government did not challenge the veracity of the document, or launch a leak inquiry, suggests that it was deliberately made public.)
The Treasury warned ministers that the government might need to increase taxation by between £25bn and £30bn a year (equivalent to an increase in the basic rate of income tax from 20% to 25%) to fund the increased debt, stating that the government might need to break its 2019 general election manifesto promise not to increase the headline tax rates of income tax, national insurance and VAT. It advised ministers to increase corporation tax and to consider introducing novel taxes, such as a carbon tax or a levy to fund increased expenditure on the NHS and social care. Abandoning the government’s commitment to the ‘triple-lock’ on state pensions, for example, would save £8bn a year (the cost of state pensions could increase significantly if prices and earnings rise sharply during or after the economic recovery); while the imposition of a two-year freeze over public sector pay would also save billions.
The chancellor has understandably refused to rule out tax increases and public spending cuts, but it has been reported that the prime minister has overruled the chancellor’s wish to suspend the pensions triple-lock on the grounds that it would antagonise working age taxpayers by giving pensioners preferential treatment when we are all supposed to be in it together.
Government debt has risen to over £2 trillion, the first time it has exceeded the GDP since the early sixties. The government has borrowed £221.2bn in the first five months of the financial year. There has been a decline in VAT, corporation tax, and income tax and NICs receipts. The Office of Budget Responsibility had forecast in March 2020 that the government would have to borrow about £175bn for the whole of 2020/21. But the Financial Times has estimated that the total level of borrowing for the year could be as high as £400bn.
The government has increased expenditure on the NHS, testing and tracing and vaccines; deferred the collection of tax revenues; provided additional support for individuals and businesses during the pandemic. It is also expected to suffer substantial but as yet unquantified losses on the business loans it has guaranteed (which are interest-free during the first year); the measures in the Treasury’s winter economic plan are expected to cost £10bn. The government’s borrowing could amount to more than twice its requirement during the previous high point, during the financial crisis (2009/10).
But the government is practically flush with funds. The Bank of England has granted it an overdraft of £400bn. The Treasury’s Debt Management Office (TDMO) is borrowing unprecedentedly large sums of money every month without difficulty. The government is spending significantly less on servicing the debt than the Treasury estimated it would have to do. A substantial proportion of the interest on government debt is being paid to the Bank of England itself because of its programme of quantitative easing (QE) ’to calm markets and to keep inflation on track…in terms of smoothing the profile of government borrowing and the impact it might have on financial markets’.
The Bank has purchased a total of £310bn of gilt-edged securities during the crisis from discount houses, and from the banks, pension funds and insurance companies that hold them as reserve assets. Taken together with the gilts it purchased in the financial crisis, the Bank now holds £745bn of the total public debt. The Bank’s purchase of government debt at commercial prices from discount houses, banks and insurance companies was a less inflationary course than printing money or directly purchasing debt from the government. The future cost of servicing government debt has declined, and the TDMO has also been able to extend the maturity of government debt.
The current demand for gilts is so strong that the governor of the Bank told a parliamentary committee that, for the first time in its history, it was considering the use of negative interest rates. Investors in government bonds effectively paid to lend money to the UK government when the interest rate in a gilts auction fell below zero for the first time. The public debate presently underway between some members of the Bank’s rate-setting monetary policy committee and its deputy governors about whether it should adopt negative interest rates has led to mixed messages about the Bank’s intentions; it risks causing instability in the financial markets. The pricing in futures markets is increasingly predicated on the assumption of negative interest rates next year, and rates below 1% until 2025. The policy would have only limited effectiveness in encouraging increased spending and investment in the long-term, and it would discourage businesses from maintaining reserves for future contingencies. Negative interest rates would also penalise the thrifty, particularly those who rely on their income from savings to supplement their meagre pensions or earnings.
The UK government is attempting to revive the economy and to increase employment to the point where the price level starts rising and the Bank has to begin to increase interest rates off the floor. The Bank could then begin unwinding its asset purchases, and be able to increase interest rates to counter a surge in inflation. The governor of the Bank has said that it would need to create enough ‘headroom’ before it could intervene with another rapid burst of QE in the event of another crisis. Its holdings of gilts currently amount to about 34% of GDP, a lower proportion of government debt holdings than held by the European Central Bank or the US Federal Reserve.
Mr Sunak is likely to publish a fiscal rule to set out the parameters for the government’s future spending and borrowing. His promulgation of a rule, however loose, to bring down the level of debt after the pandemic subsides would reassure future investors in public debt that the government would maintain fiscal discipline to avoid inflation. Taxes will be increased to fund expenditure and repay public debt, but only after the economy has recovered and the country returned to prosperity.
Impact of job retention schemes on employment
The job retention and the self-employed income support schemes, along with government-backed loans, have cushioned the impact of the slump. They have preserved jobs and businesses in the short term. While the wider long-term impact of these schemes has still to be assessed, it is clear that they will not in themselves encourage economic recovery. It is inevitable that some businesses will falter when they come out of suspended animation, particularly if they lacked reserves before the lockdown; some firms might go out of business. The job retention scheme gave businesses an opportunity to delay changes which might have been vital for their survival. It has delayed the unemployment resulting from such changes, not obviated them.
Workers on furlough will only be able to return to work if their employers want them back. Some of them may not be keen to rush back to work after being paid for so long not to do so: the furlough might have eroded their work ethic.
Workers will need to seek other jobs if their employer ceases trading, and so may need to retrain. The government missed an opportunity to help employees enhance their skills while on furlough. It could have offered them incentives to undertake online courses to learn new skills, such as coding or new languages, and enhance their employability, rather than paying them to sit at home.
Many, perhaps most, of the workers still on furlough are from the hospitality and leisure sectors. The businesses in these sectors were devastated by original lockdown. They found it hard to recover when the restrictions were eased because of the introduction of rules on social distancing. They are unlikely to be able to afford to pay their workers, even on a part-time basis. The curfew introduced following the resurgence of Covid-19 has clouded over the ray of optimism created by the month-long ‘eat out to help out’ scheme.
The most effective way to encourage businesses to retain their existing workers (or hire more of them) would be to increase aggregate demand and to reduce the cost of employing staff. But the government was so concerned about the number of job losses that it offered employers an incentive of £1,000 per worker if they retain staff previously on furlough until the end of the year. The incentive is largely deadweight because businesses will only retain the workers they need; at £1,000, the payment is not a sufficient inducement to retain workers for whom they no longer have any commercial requirement.
Jim Harra, the chief executive of HMRC, wrote to the chancellor on 7 July to ask for a formal instruction to implement these proposals. He said that, as HMRC’s principal accounting officer, he was obliged to make sure that his department’s use of its resources was appropriate and consistent with the Treasury’s guidance to departments on the need to ensure value for money. He said that the efficiency of the measure was ‘currently highly uncertain’.
Despite the Bank’s relative optimism about a rapid economic recovery, there are a number of factors that will militate against it.
The curbs introduced by the government following the increase in the number of daily infections from the virus has led to fears that it might lock down the economy again to suppress the spread of Covid-19. The government’s failure to establish an effective system for ‘testing, tracking and tracing’ those who have been infected and their contacts and the lack of an effective vaccine have led to fears about further waves of the virus.
The UK’s low productivity growth vis-à-vis its principal trading partners was the biggest challenge facing the economy before the coronavirus. The economic lockdown has intensified the underlying problems that since the financial crisis in 2008 have caused economic growth to falter and held back any sustained improvement in living standards.
Productivity growth is fuelled by investment, innovation and improvements to the skills of the workforce, all of which have been dented by the crisis. The productivity shortfall will persist despite the temporary upsurge in economic growth in the early stages of the recovery, as firms deal with pent-up demand and shed staff who had been sheltered by the job retention scheme.
Increasing expenditure on research and development (R&D) that the government directly funds, enhancing tax incentives to companies that undertake such activities, and retraining workers would stimulate innovation, productivity and economic growth, and create spillover benefits for businesses throughout the economy. The government’s proposed introduction of a ‘lifetime skills guarantee’ could reverse the underfunding of technical further education, and expand the supply of skilled workers that has contributed to the UK’s chronically low productivity. It would be expensive to increase the availability and accessibility of high quality vocational training for the workforce but the investment would be repaid many times over through their enhanced productivity and higher economic growth.
The chancellor can highlight his commitment to boosting productivity growth by reiterating the encouraging announcements he made about increasing support for R&D activity in his first budget, which was blown off course by the pandemic. The government could also announce increased investment into researching medical drugs and health care systems; and investment into R&D to tackle other future risks, notably those posed by climate change.
The government could achieve a step change in R&D by launching a wide-ranging consultation into how to widen and increase tax relief for R&D expenditure by businesses, particularly in intangible assets and human capital. There is a strong case for the government to support university R&D activities that are now threatened by the collapse in their fee income from overseas students; universities make a vast contribution to R&D and are, for example, in the forefront of the search for a vaccine for the coronavirus.
The government could take advantage of historically low interest rates to fund direct government investment on capital infrastructure projects, such as improvements to the UK’s broadband coverage throughout the country. (The UK ranks 47th in the world for internet speed.) Such expenditure would generate a cumulative return that would exceed the liabilities incurred by the government. The City is likely to be more supportive of government borrowing to fund capital spending on such projects than political vanity projects such as HS2 or the construction of a bridge between Scotland and Northern Ireland. (Boris Johnson mooted the idea when he was foreign secretary, and he has directed officials to investigate its feasibility and cost since becoming the prime minister.)
This would add to the business and economic upheaval caused by the coronavirus. Well-informed commentators have said that an agreement is within ‘touching distance’. But if isn’t, the imposition of tariffs on trade between the UK and the EU would dampen growth in the UK to a greater extent than it would affect the EU. There would also be considerably more cost and bureaucracy for businesses that trade with the EU (the government is helping businesses to hire and train 50,000 customs staff).
The Cabinet Office has prepared contingency plans to deal with the risk of the UK exiting the EU without a trade deal coinciding with a second wave of Covid-19 infections. These include strategies to mitigate the risks posed by the shortage of vital supplies, including the use of the army to police public disorder in case of food shortages, and the deployment of the Royal Navy to prevent EU vessels illegally intruding into UK fishery waters.
To ensure continuity of essential medical supplies, the government has asked the pharmaceutical industry to stockpile at least six weeks of stock on UK soil. The crisis has reduced the financial ability of some businesses to build up stockpiles to mitigate the risk of severe delays to their supplies.
The government has deferred the collection of substantial tax receipts, and persuaded lenders to allow borrowers to delay the payment of mortgage payments and credit card bills. The government has, through the British Business Bank, guaranteed loans amounting to £57bn to businesses.
There is a qualitative difference between the credit worthiness of the different types of government-supported loans made during the crisis. The short-term loans made by the Bank of England under its corporate financing facility are probably the least risky (they accounted for much of the government-guaranteed lending), because it provided the facility in return for short-term commercial paper from the companies.
The government has guaranteed 80% of the value of the business interruption loans made by commercial banks aimed at SMEs with a turnover of up to £45m (total value of loans: £15.5bn), and at larger businesses with a turnover of up to £200m (total value of loans: £3.8bn). The banks went through their normal lending procedures, and asked for financial accounts, business plans, and cash flow projections before they granted these loans. They also asked for collateral for the full value of the loans until the government prohibited them from seeking security for the proportion of the loans guaranteed.
The loans made by the banks under the bounce back loan scheme are less creditworthy. The government has fully indemnified banks against the risk of default by borrowers to ensure that they received funding with minimum of ‘banking bureaucracy’. They have been extended to the smallest businesses with only the most basic checks, and without investigating the creditworthiness of the borrowers and the purpose to which they were to be applied. Most of these businesses would have found it difficult, if not impossible, to borrow from banks under normal commercial terms.
There is anecdotal evidence of fraudulent applications for bounce back loans. It is not clear if the banks regard themselves as responsible for investigating such illegal activity. (HMRC has already started investigating false applications for the job retention schemes and claims of non-compliance with its rules by employers.)
The commercial banks will vigorously pursue those who default on business interruption loans because they are the beneficial owners of 20% of the debt. But they will have no comparable incentive to chase up borrowers who default on bounce back loans. There is no requirement to pay interest or repayments during the first 12 months of the bounce back loans. The spectre of unpaid debt that was hanging over the small businesses that have taken out these loans has been lifted by the chancellor’s announcement that the repayment period for their repayment period has been extended from six years to ten, and they will have more flexible ‘pay as you grow’ repayment schedules.
There have been of warnings that up to half the £38bn loaned to the 1.26m borrowers of such loans are unlikely to be ever repaid. Some borrowers may be unable to meet their monthly repayment installments despite the breathing space provided by the extension of their loans. If the lenders are responsible for chasing delinquent borrowers, it is unclear how they would be reimbursed for the cost of collecting the debt from recalcitrant borrowers. The government would have to bear the full political cost of any such action. The government has mitigated the risk of large numbers of small businesses being pursued through the courts for their failure to meet the monthly repayments on their bounce back loans in the run-up to the next election. The value of the debt written off as irrecoverable would have to be treated as public expenditure.
In contrast, however, the government is expected to make a handsome net profit from the £720m it has invested in the more than 700 fast-growing high-tech businesses. The investments were made through its future fund to drive forward research and development. Most of these companies are loss-makers at present, but many are expected to make breakthroughs that could make them extremely valuable.
Under the terms of the scheme, the government’s funding had to be matched by the original investors, and it had to be granted the right to convert its support into equity at a discount in three years’ time. The government’s shareholdings in these companies will probably be sold to hedge funds; the chancellor has made it clear that he does not want the Treasury to end up with a minority interest in lots of small companies.
This would involve a chronic lack of aggregate demand leading to a permanent decline in economic activity and employment. Aggregate demand will fall if households respond to the crisis by permanently increasing their savings ratio as a precautionary measure against future crises. The more people save, the less they have available for consumer expenditure. Fear of unemployment and loss of confidence about the future have caused households to reduce debt and increase savings by curbing their consumer spending. Private investment has also declined because of the loss of business confidence.
The crisis has intensified the financial risks faced by poorer households; many are on benefits or in insecure low-paid or part-time roles, and some of them went into the crisis with debt problems. But higher income households have reduced their spending by more than the fall in their incomes. Some taxpayers with high incomes have already had to increase their personal savings to achieve their target post-retirement incomes because of the reduction in the value of their pension funds.
Low interest rates, the job retention scheme, business grants and the ready availability of government-guaranteed loans have encouraged the growth of ‘zombie companies’. Such businesses would, in normal times, be unable to cover their debt-servicing costs from their operating profits. Government bailouts have enabled businesses that were struggling before the pandemic struck to saddle themselves with levels of debt that they would not have been able to obtain on commercial terms. Such companies have been kept in business solely by public funding to preserve their employees’ jobs, sapping the economy of dynamism and slowing economic growth.
Although the economy is operating well below capacity at present, there are signs of incipient inflation because of the massive fiscal and monetary expansion in the economy. The Bank of England’s inflation target for the year is 2%. The consumer price index increased by 1%; the retail prices index rose by 1.6% in the same period. These indicators are likely to dip in the coming months to reflect the government’s temporary cut in VAT for hospitality, accommodation and tourist attractions, and its month-long restaurant discount scheme.
But factors such as social distancing and the cost of personal protective equipment have led to a cost-push increase in the price of services, as businesses attempt to pass on their increased operating costs to customers. There are also signs of demand-pull inflationary tendencies; e.g. the rise in plane fares to countries not included in the government’s quarantine list. The recent jump in the price of gold has led some commentators to suggest that investors are doubtful about whether the low and stable level of inflation in the UK and other advanced economies over the past decade is likely to persist.
The government’s largesse in the form of increased public spending and its facilitation of substantial bank lending have injected vast purchasing power into the economy that will directly raise the broader measures of money and spur an increase in the price level. There could be a surge in inflation of up to 10% in 2021/22, as is usual in the aftermath of wars. However, the impact of such inflation is likely to be mitigated by the length of time it takes to tame Covid-19.
The government would tacitly welcome the return of inflation that would accompany the restoration and growth of economic activity. It would increase tax revenues through ‘fiscal drag’, reduce the real value of its borrowing requirements, and erode the value of public debt. But the return of inflation could also trigger demands for higher wages, particularly if the government succeeds in reversing the growth in unemployment and the labour market begins to tighten. A rise in inflation would be tantamount to an arbitrary tax on those living on un-indexed fixed incomes, debtors, and those holding cash balances.
The Tory party made ambitious promises to ‘level up’ the areas where its so-called ‘red wall’ parliamentary constituencies are located, but the crisis has limited the scope for the wholesale transformation of the economy. There is a risk of widespread unemployment in these regions. Many older and less productive businesses are located there, and are expected to suffer the most from the UK leaving the EU without a deal.
Once the government is free of EU state aid rules after the end of the year, it will come under pressure to subsidise struggling businesses to protect jobs for electoral reasons. The government might be tempted to use its ‘Project Birch’ scheme to provide funding to large companies in the older heavy manufacturing industries; many have seen their markets collapse during the pandemic. Project Birch is intended to protect ‘strategically important’ companies whose failure would ‘disproportionately harm the economy’. But the criteria for establishing which companies should receive special treatment are likely to be drawn widely to allow ministers to retain flexibility.
Without greater transparency about these rules, there is a risk that the scheme could degenerate into a 1970s-style mechanism for allowing the government to rescue ‘lame ducks’.
Future tax strategy
Given the current level of public debt and uncertainty about the timing and path of the recovery of the economy, we shall in the medium to long-term almost certainly have to live with both higher public debt and higher taxation. The government is unlikely to break its totemic 2019 election manifesto commitment not to increase the headline rates of income tax, national insurance and VAT, at least in the short term.
There needs to be a public debate about the adequacy of public services following the long period of austerity, and how and by whom the increased public expenditure and the increased public debt created during the crisis should be paid. The government will not be able to keep borrowing indefinitely. There is limited scope to reduce public expenditure. Taxes will have to rise. It is naive to argue that the solution lies solely in taxing ‘the wealthy’ (the top 1% of taxpayers already pay over a quarter of all income tax) and ‘closing down tax avoidance’.
There has been considerable speculation about how the chancellor might increase taxation. ‘kite-flying’ by political special advisers to test the reaction to possible measures has led to headlines about imminent increases in taxation. Most of the measures discussed in the media are routinely included in the list of potential revenue-raisers that HMRC and the Treasury provide to the chancellor in the run-up to fiscal events. Such lists invariably begin by reminding ministers that the fairest and most effective way of raising additional revenue would be to increase the existing rates of income tax or to introduce new additional rates of income tax for those who receive higher incomes. The other measures that would be included in such advice are likely to include:
The government is under considerable pressure to reform the system because the crisis has made the chronic problems of the sector more acute. Boris Johnson promised in the 2019 general election to ‘fix’ social care funding, so that the elderly would not need to sell their homes to pay for their care. His government has yet to come up with any specific proposals.
A growing proportion of health service costs are devoted to addressing the medical needs of the rapidly growing number of older members of the population. The demands of health care for the elderly are intertwined with the challenges of social care. The distinction between health and social care has been a barrier to the design of effective policy.
The biggest problem with fixing social care has been how to fund the necessary public expenditure. The government could follow the example set by the Labour Party in 2002, and announce a 1% increase in NICs for the specific purpose of paying for social care. The Labour Party was initially criticised for breaking its manifesto pledge not to increase taxation, but the measure eventually gained public support. However, the government would be hard-pushed to develop, consult on, and begin the implementation of its proposals before the country is in the run-up to the next election.
The government could also announce that those over the state pension age and still employed or self-employed would cease to be exempt from NICs on their earnings. The change is necessary to avoid the intergenerational tension that might result from the rapidly rising dependency of older citizens on the working age population for the payment of their pensions. But the influence of the ‘grey vote’ might make the government wary of risking a row with its own backbenchers.
When the chancellor announced the SEISS in March 2020, he said that it was hard to justify the fact that the self-employed pay lower NICs than employees. It remains to be seen if Tory backbenchers allow him to revive former chancellor Philip Hammond’s attempt to reduce the gap between the NICs paid by the self-employed and employees. To allay the opposition to the change within the Conservative party, the reform could be phased in over two to three years. The government could also sweeten the change by granting the self-employed entitlement to statutory maternity relief and statutory sick pay.
The chancellor denied some 2m company directors, who are owners of incorporated small businesses, income support on the dividend element of their income under the job retention scheme.
The changes introduced to dividend taxation in 2016 redressed much of the imbalance between the taxation of dividends paid in lieu of remuneration, compared to profits that are directly earned by self-employed individuals. But people with exceptionally high personal incomes, such as successful actors, sportsmen, and entertainers, have continued to incorporate companies to receive their business and non-employment income to reduce their liability to income tax.
Treating income arising from similar economic activities in different ways, depending on the business form they choose to adopt violates the principle of adopting a neutral tax treatment across business forms. Allowing the practice to continue is distortionary and inefficient, and it leads to the misallocation of resources. The most direct way to prevent small companies from being used for tax avoidance or tax deferral is to legislate to make companies that are, say, controlled by five or fewer individuals or persons connected with them, “fiscally transparent”; or, alternatively, to make such companies’ profits liable to income tax rather than corporation tax.
The chancellor’s decision to ask the OTS to review CGT is not a harbinger of an increase in the rate at which it is charged. The current rate was set a level that maximises the yield. Ministers have repeatedly been advised to consider the abolition or restriction of the current exemption for gains from the disposal of a taxpayer’s principal private residence but have consistently rejected the option.
The exemption is a popular perk for middle class taxpayers, but there is a strong case for restricting either the number of times the relief can be claimed, or placing a limit of say, £500,000, on the amount of the exemption from such chargeable gains.
The chancellor would be able to increase tax revenues by up to £10bn a year by restricting the availability of tax relief on pension contributions to the basic rate of income tax. He could do so on a phased basis, to avoid disadvantaging those who are within, say, five years of reaching the state retirement age.
He could also use some of the revenue to address a pensions anomaly in the tax system that adversely impacts 1.7m low-income workers (mostly women) who earn below or just above the personal income tax allowance. They do not receive tax relief on some or all of their contributions, because their employer’s pension scheme uses net pay arrangements, making their pension saving up to 25% more expensive compared to workers whose employers use relief at source arrangements. The Treasury is currently conducting a review into this, as promised in its 2019 general election manifesto.
The incidence of Covid-19 has highlighted the risks from obesity and diabetes. The prime minister has blamed his then weight for making him vulnerable to the virus, and embarked on a public attempt to lose weight. The government could introduce a measure to encourage food manufacturers to reduce the fat content of processed foods, following the relative success of the soft drinks industry levy (2018). It would not raise significant revenue, but it would earn political kudos for the government from medical professionals.
The UK has experienced a significant reduction in greenhouse emissions during the lockdown because of the reduction in traffic and economic activity. But carbon dioxide levels will increase as soon as the economy returns to normal. It is government policy to replace vehicles that currently operate on petrol and diesel with fully electric cars to reduce greenhouse gas emissions. The previous government announced that the sale of cars with combustion engines would end in 2040. There is a consultation currently underway that could result in ministers bringing that date forward.
Successive governments have frozen fuel duty since 2010, a policy that flies in the face of their stated environmental objectives. The price of petrol and fuel has fallen in real terms, while the cost of public transport has risen faster than the rate of inflation. The government could enhance the credibility of its wider environmental policies by increasing fuel duty on an annual basis, and by introducing a ‘car scrappage’ scheme similar to the one implemented in 2009 to give people an incentive to trade in older vehicles for electric cars.
There has been a renewed interest in the introduction of a wealth tax during the pandemic. The introduction of an annual wealth tax would help to mitigate the economic, social and political risks posed by wealth inequality. However, it would be electoral suicide for a Tory government to propose, let alone introduce, such a measure, outraging its wealthy donors and supporters. Even the new leader of the Labour Party, which attempted to introduce a wealth tax when it was in government in 1974, seems to have politically distanced himself from the policy.
The government has relied primarily on borrowing rather than taxation to fund its increased expenditures during the Covid-19 pandemic. It will continue to do so until the economy has recovered, because any premature increase in taxation could jeopardise the nascent recovery. It is currently able to meet its funding requirements through borrowing at a modest cost, but it will need to increase taxation to repay public debt and to fund its ambitious manifesto commitments. The government will probably delay the implementation of any increase in taxation until the economy has securely recovered. Economic growth and inflation would help to reduce the burden of public debt and taxation.
.tmb-editorspic.jpg?sfvrsn=df04ab27_1)
