We must soon reckon with the most contentious economic question: who pays for this crisis?

The public finances must be repaired but how to share the burden?

April 17, 2020
Chancellor Rishi Sunak Photo: HENRY NICHOLLS/WPA Rota/Press Association Images
Chancellor Rishi Sunak Photo: HENRY NICHOLLS/WPA Rota/Press Association Images

Universal credit claims soaring. Nearly a third of businesses laying off workers. Economists predicting the steepest collapse in GDP on record. Statistic after statistic justifying the unprecedented interventions overseen by the chancellor to deal with the economic impact of Covid-19.

Implementation issues aside, the approach has rightly drawn broad support. Economists and politicians of all persuasions agree the Treasury should throw the kitchen sink at the economy to minimise the permanent damage caused by the lockdown.

Yet throwing caution to the wind short-term shouldn’t mean ignoring the future. The economic impact of this crisis will play out in four phases, with each one influenced by the choices made in the previous ones, culminating in a fierce debate about who pays for it all. Moving through these phases, the current political consensus around the economic response will disintegrate, giving way to battle lines likely to define the terms of the next election. For the Conservatives in particular, uncomfortable ground lies ahead; they must start thinking now about how to navigate it.

The current phase is the most unprecedented: large swathes of the economy put into hibernation, with the government paying businesses to stop operating to limit the virus’ spread. Soon we will move into phase two: slowly rebooting the economy as the lockdown lifts. With consumer confidence and business investment intentions almost certainly still low, the chancellor may need to provide additional support to stimulate demand.

The politics get harder during the third stage as the economy adjusts to the post-Covid-19 reality: supply chains may be transformed; people’s travel and working habits will be different; and the government will want to build the resilience of the private and public sectors to future shocks. Because these will be long-term shifts, the government will need to move from a bailout mentality to letting the economy restructure—with the bankruptcies and job losses this will entail. Difficult enough in normal circumstances; harder still on the back of the mantra of doing “whatever it takes” and the biggest private sector bailout in British history.

The hardest part, however, will be the final phase. Concerns about the public finances shouldn’t constrain the short-term response, and persistently low interest rates mean the debate on fiscal policy has moved on since the financial crisis. But the reality is that post-crisis our national debt will reach levels unseen since the aftermath of the Second World War. Given that we have had two enormous economic shocks in little over a decade that have sent debt soaring, it would be reckless to assume the coming decade will be shock free, or that interest rates will stay low permanently. The structural deficit will also be bigger than pre-crisis; the only question is by how much. The chancellor will therefore need to reduce borrowing.

The timing of this fiscal consolidation will be contentious. The economic argument to delay until the economy is fully recovered will collide with the political reality that the easiest time to persuade Tory MPs to raise taxes or cut spending will be when the deficit is highest and the next election years away.

The key political debate, however, will be on substance. In 2010, George Osborne’s main tool was cuts to spending on public services and welfare. But the public had already grown tired of cuts before Covid-19, and the vital role the NHS and welfare system have played in dealing with the pandemic will reinforce that.

The capital budget is generous by historic standards but, while schemes delivering genuine economic returns must be ruthlessly prioritised over political vanity projects, Britain’s productivity problem will not fix itself. Well spent capital must be part of the answer.

Rishi Sunak will therefore need to follow in the footsteps of many a Tory chancellor and raise tax to keep borrowing under control. That being so, he should lean into it.

In present circumstances, there is a strong Conservative case for tax rises: not wasting billions on debt interest; preserving capacity to deal with future shocks; and not passing enormous debts onto future generations. Building on that, the chancellor should outline three principles to underpin his approach.

First, reform. Our tax system is riddled with perverse incentives and needs updating for the digital age. From business and property tax to the balance of taxation between income and wealth, the system needs to change.

Second, fairness. Existing high levels of inequality were already undermining faith in our system and holding back social mobility, and IFS analysis suggests those on lower incomes will suffer the biggest losses from this crisis. Those at the top of the distribution must do the heavy lifting when it comes to paying for it.

Third, unity. The wealthiest cannot bear the burden alone. Labour has spent five years claiming you can finance extraordinary spending increases simply by taxing the richest and business more. It is neither feasible nor desirable. The crisis has brought a remarkable unity of purpose to the country. We need to carry that into the debate about who pays for it. Young and old, businesses and households must all chip in, not only to make the maths add up but because it is important for our cohesion as society that the vast majority contribute something.

The Tory party has struggled in recent years to elicit a clear economic plan. It should use the fallout from this crisis to reset its economic strategy for the coming decade: staying true to its core beliefs in the importance of the market and fiscal prudence, but adapting them to a changing world. The central goal should be to build a more inclusive economic model, at the heart of which should be a better, fairer tax system.


The writer is a former senior Treasury adviser to Sajid Javid and Philip Hammond. He is a partner at Flint Global and is writing in a personal capacity