Austerity 'not needed' to pay coronavirus bill, think tank says, as virus spending predicted to top £130bn

The Office for Budget Responsibility (OBR) said it expects spending on furlough schemes and grants to the self-employed will cost an estimated £132.5bn in the current financial year, rising from £123.2bn at the last update on May 14.

Officials have previously said the extra spending was helping to partially offset the plunging gross domestic product (GDP) used to measure growth.

But after Prime Minister Boris Johnson warned on Wednesday there would be “many job losses” as a result of the economic impact of the crisis, cuts across a number of sectors were predicted yesterday.

About 1,500 jobs are set to be axed and another 12 showrooms closed at the struggling car dealership, Lookers, as the group announced plans to slash costs in the face of the crisis and a tough car market. Aston Martin has said it plans to cut up to 500 jobs as part of a major restructuring at the luxury car manufacturer.

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And tens of thousands of aerospace and aviation workers are set to lose their jobs as a result of the coronavirus crisis, an industry expert has warned.

Paul Everitt, the chief executive of the ADS Group, said redundancies will be made in the coming weeks and months because of the collapse in demand for flights.

The centre-right think tank, Policy Exchange, said austerity should be avoided and tax increases are not necessary to deal with the financial impact of the crisis.

A paper instead urges the Government to take advantage of low inflation, rates and yields to borrow to reduce the debt to GDP ratio “gradually”.

However, it warns Ministers must have a “credible strategy to reduce the debt burden in the future” – and notes there is no “magic money tree”.

The paper, co-authored by Dr Gerard Lyons, Mr Johnson’s former chief economic adviser as London mayor, recommends giving temporary tax cuts to help the post-crisis recovery, including reductions in the rate of VAT and stamp duty.

Arguing for “a pro-growth strategy” which reduces unemployment and brings the public finances “back into shape”, the paper says: “There is ample scope in the current economic climate, of low inflation, rates and yields for the UK to implement a sizeable counter-cyclical monetary and fiscal policy.

“High debt levels are financeable in this context, and austerity is not needed.”

For the arts, entertainment and recreation sector, the paper suggests cutting social distancing from two metres to one and urges the Government to extend furlough payments and other schemes.

The authors also suggest the Bank of England’s two per cent inflation target should be replaced with a four per cent nominal GDP target.

They say such a move would “allow policy to act as a more effective economic stabiliser” and would “help protect against higher inflation in an upturn, and guard against weaker demand in a downturn”.

Polling carried out for Policy Exchange suggested 75 per cent of the public are worried about increasing levels of Government borrowing and public debt, while 49 per cent are worried about having to pay higher taxes as a consequence.

Only 16 per cent support a new round of austerity and cuts to public spending, the polling of 2,475 British adults between May 15 and 18 found.

Dr Lyons, a senior fellow at the think tank, said: “A pro-growth economic strategy is needed. This environment of low inflation, rates and yields has created a window of opportunity to emerge from this crisis without being panicked into austerity or tax increases.

“High government debt levels are financeable in this environment and they should be used to fund infrastructure and investment. The Government should plan to ensure confidence in the fiscal outlook by planning to reduce its ratio of debt to GDP steadily over time.

“We also recommend a new remit for the Bank of England, replacing the two per cent inflation target with a four per cent nominal GDP target. This would help protect against higher inflation in an upturn, and guard against weaker demand in a downturn.”

Co-author Warwick Lightfoot, head of economics at Policy Exchange, added: “In the present crisis, perhaps the most serious since the 1930s, when monetary policy is not available as an effective instrument of macro-economic stimulus, the costs for governments of using debt and fiscal policy are at their lowest in modern financial history.

“The combination of very low inflation and a surplus of international savings has resulted in extraordinarily low interest rates and long-term government bond yields. This is not the time to hold back on borrowing.”

Meanwhile, peers called for a stimulus package to prevent coronavirus jobs slump.

Former chancellor Alistair Darling urged the Government to stimulate the economy to prevent millions going on the dole.

Lord Darling of Roulanish said people would lose their jobs due to the coronavirus crisis.

But he said a stimulus package, including a cut in VAT, could help mitigate the impact.

In a virtual Lords debate yesterday, on the economic lessons to be learned from the pandemic, Lord Darling said getting the Covid-19 testing regime working was critical.

“At the moment the promises are not being met by reality,” he said.

“Delivery matters and the Government needs to pay attention to that.”

The Labour peer, who was chancellor during the global financial crisis of 2008, said only the Government could support the economy and get people back to work.

“I understand people’s concern about debt. But we have to look at it in the same way as we did in the aftermath of the Second World War.

“We are going to have to spend a lot of money to get our economy going and preserve its fabric.”

Lord Darling warned that the UK was reaching the most difficult part of the crisis and that as furlough schemes ran out, unemployment would rise.

“The Government must do everything it can to stimulate the economy with things like a cut in VAT, perhaps a scrappage scheme for cars, and so on.”

There would also have to be continuing support for companies through grants or loans and retraining schemes for workers.

He said people would lose their jobs but added: “We cannot allow ourselves to go back to the 1980s when millions of people went on the dole queues and many of them never came off. That scarred the whole country.”

Former head of the civil service Lord Kerslake warned that hopes of a “rapid V-shaped recovery now seem very optimistic”.

Lord Kerslake, an independent crossbench peer, said economic activity should be expected to fall sharply and unemployment to rise sharply.

He said the natural instincts of the Treasury would be to “rein in spending” but urged ministers to “resist this temptation”.

In a period of huge uncertainty, “private investment and consumer spending will fall and only the state can provide confidence”.

Lord Kerslake said a major stimulus package would be needed to get the economy moving again.

Opening the debate, Labour’s Lord Eatwell, a former economic adviser to the party, warned that austerity had killed the recovery after the 2008 economic crisis “stone dead”.

Lord Eatwell said further austerity would just add to the “terrible cost” of the pandemic and urged the Government to build a more resilient economy.

Tory former minister Baroness Buscombe said the gateway to economic recovery was to cut the two-metre social distancing rule to one metre, warning that nothing was viable “unless we take a proportionate, sensible and informed approach to risk”.

For the Liberal Democrats, Lord Fox warned that a no-deal Brexit on top of the coronavirus crisis would be careless with people’s lives and prospects and called for an extension to the transition period to give time to secure the best possible trade arrangements with the EU.

Treasury spokesman Lord Agnew of Oulton said coronavirus was the biggest threat faced by the country for decades, with a “devastating impact” right across the world.

Lord Agnew said Britain was facing a “economic emergency” as well as a “health emergency”.

The coronavirus crisis would have a “very significant impact on our economy,” which was why the Government had announced unprecedented support for businesses and individuals.

Not to be spending at these levels would cause even more damage and leave “permanent scars,” he said.

Winding-up the debate, Lord Agnew said the timetable for lifting restrictions depended on successfully controlling the spread of the virus.

He ruled out an extension of the Brexit transition period and said the Chancellor was focused on the necessary steps to promote a strong and sustainable recovery.

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