Finance minister Rishi Sunak signaled the U.K.’s fiscal rules could be ditched as he prepares a massive package of measures to tackle the coronavirus crisis.
In television interviews on Sunday, Sunak signaled he’s weighing up higher borrowing as he finalizes proposals to shore up the economy and help businesses in Wednesday’s budget.
“We need to make sure that we respond at scale to whatever scenario comes our way -- I can commit that we will do that,” Sunak told the BBC’s Andrew Marr Show. “I know that we will get through it.”
The budget was meant to be the landmark moment Boris Johnson’s new government unveiled its great vision, with ambitions for a massive increase in infrastructure spending to revive “left behind” regions of the U.K. Instead, Sunak, the chancellor of the exchequer, has been forced to re-write his fiscal statement in the face of the virus outbreak, which is spreading in the U.K. and has upended markets around the world.
Sunak said there was a strong macro-economic debate about the U.K.’s opportunity to borrow more. “Interest rates are very low, and they have been very low for a while,” he said. “Of course I am engaged with those debates as you’d expect me to be.”
Sunak was asked repeatedly whether he would commit to keeping the fiscal rules he inherited from his predecessor, Sajid Javid, last month. The rules require day-to-day spending and revenue to be in balance or surplus in three years, and even before the crisis there were doubts that they could be met without tax increases or further cuts to public spending.
The chancellor acknowledged that the official forecasts that will accompany the budget risk being left behind by events. The Office for Budget Responsibility completed its baseline estimates, which do not take account of government policy, in February, before it was clear how quickly the virus would spread. There could be more “volatility” around those forecasts in the short term, Sunak said.
He said the economy and the public finances were strong after years of belt tightening, meaning the government can take “whatever action is required” to help tackle the crisis. One leading economist said the virus would not be a justification for breaking the fiscal rules.
“Clearly there is a case for spending more and possibly having some targeted tax cuts in the short term because of the threat of the virus,” said Paul Johnson, director of the Institute for Fiscal Studies think-tank in London. “But that really ought not to impact on the long run fiscal policy of the government, which is what the fiscal rules are based on.”
Sunak, Johnson and Bank of England Governor Mark Carney have held talks over the response to the threat the virus poses to the economy, fueling speculation about the possibility of coordinated action including interest-rate cuts next week.
“It’s because successive Conservative governments have been fiscally responsible that we are able to respond in scale to the challenge we are facing,” Sunak said.
Sunak to Lift Spending on Flood Defense in First U.K. Budget
Sunak’s budget, due on March 11, had been expected to include a major review of infrastructure spending -- a key plank in Boris Johnson’s mantra to “level up” Britain’s poorer regions and help them narrow the gap with London and the southeast. The document will now be coming “in the coming months,” Johnson’s spokesman, Jamie Davies, told reporters last week.
Sunak told the BBC that the government faced a “huge” task in addressing coronavirus, but promised to give the National Health Service whatever it needs to deal with the the “health crisis.”
He said the impact of the virus on business could be “significant” but insisted it would not last. Speaking on Sky TV’s “Sophy Ridge on Sunday,” the chancellor was pressed on whether the government would step in to help struggling companies.
“This could be a challenging period for businesses,” Sunak said. “If 20% of your workforce is not able to come to work and you can’t do what you normally do, that’s going to have an impact but it will be an impact for a temporary period of time.”
The Institute for Fiscal Studies warned the blow to the economy could be “substantial but hopefully short-lived,” with the effect on demand potentially greater than that on supply as the near-term loss of spending on eating out and other “social consumption” won’t be made up once the crisis has eased.
IFS Director Paul Johnson said public services and welfare benefits need to provide “appropriate support” to households and urged the government to stop a temporary downturn causing permanent damage. “Careful Government action could play a role in helping ensure that otherwise viable businesses do not go to the wall during a period of temporarily reduced economic activity,” he said.
©2020 Bloomberg L.P.
RECOMMENDED FOR YOU
POPULAR