Will it work? And who will pay? Those are the two questions raised by Rishi Sunak’s summer package to boost the economy.
The answer to the first is: to some extent yes, but that depends on a lot of other factors. And to the second it is: all of us, either as taxpayers or savers.
But I suspect the greater burden will be on savers.
Strategy: The whole drive of what the Chancellor was trying to achieve with his summer package to boost the economy was to get us spending again
Whether it works depends on two things, both of which are outside the Government’s control.
One is what happens to the rest of the world economy. Individual countries can do a little better or a little worse than the rest of the pack, but if you look at the last economic expansion, the long one that followed the 2009 recession, most of the developed world pulled up pretty much in unison.
The only part that lagged was the southern belt of the eurozone, the so-called Club Med of Spain, Italy and Greece, which suffered under a heavy load of debt. This time the European Union will try harder to make sure the Club Med countries don’t get left behind, and some sort of collective boost should be agreed shortly.
Forecasts differ about the detail of both the downturn and the subsequent recovery, and the IMF thinks that the UK will do rather worse than Germany and the US and a little better than France, Italy or Spain.
But everyone seems to agree that there will be a decent recovery next year, which is a comfort in troubled times.
The other thing outside the Government’s control is how scared we are. The whole drive of what the Chancellor was trying to achieve was to get us spending again.
The pubs and restaurants are crucial because they employ a lot of people, hence the VAT cut and the vouchers.
Keeping people in jobs is vital because if you are scared of being out of work you don’t spend money. The housing market matters because when people move they spend money on their new place.
But if we are too frightened to go out for a meal, the voucher isn’t going to make us think, ‘Oh, let’s take a chance’.
In a way the Government has been too successful. If you tell people week after week that they must stay at home, you can’t expect them to change their habits suddenly when you say it is OK to leave.
Early indications are that though things are picking up, they are doing so achingly slowly.
The more slowly activity rises, the lower the tax revenues and the higher the Government spending – so the larger the bill for taxpayers and savers at the end.
And that bill? The figures being bandied around are so bewilderingly huge that it is easiest to think in very round numbers.
The economy is about £2.2trillion a year. Total Government revenues in the year to March were £800billion. And the national debt is about £1.8trillion – before this all happened, of course.
That was about 80 per cent of GDP, a lot more than Germany but less than France or the US, and much less than Italy or Japan.
The deficit this year will be huge, say, £350billion, and it will go on being huge for another couple of years at least. So we will end up adding, say, £500billion to the national debt, which will bring it up to more than 100 per cent of GDP.
How you pay for this depends on how quickly you try to get it down. Those estimates come from the independent Institute for Fiscal Studies, which said last week that it thought taxes would have to go up by £35billion to £40billion a year.
That may not sound too bad in the context of total revenues of more than £800billion, but when you look at individual taxes it gets scary.
Put a penny on income tax and it brings in only £5billion. Inheritance tax brings in £5billion.
The total from fuel duties is nearly £30billion – but the proportion of total revenue is falling as vehicles become more and more efficient.
Besides, do you really want to risk clobbering what will still be a fragile economy by putting up taxes too soon?
Taxes may go up a bit, but politically it would be better for the Government to hold down interest rates to keep funding costs down, and hope that it can generate some inflation to reduce the real value of the debt.
Keeping interest rates below inflation is stealing from savers. But that is what they will try to do.
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