U.K. Chancellor Sunak Announces $39 Billion Stimulus for Coronavirus
U.K. Chancellor Sunak Announces Budget to Fight Virus Crisis
(Bloomberg) --
The U.K. pledged a 30 billion pound ($39 billion) emergency boost to spending as Boris Johnson’s government battles to stop the coronavirus outbreak wrecking its economy.
After the Bank of England made a surprise interest-rate cut, Chancellor of the Exchequer Rishi Sunak set out a coordinated response to the greatest threat to the world economy for more than a decade.
By Wednesday morning, 456 people in the U.K. had tested positive for coronavirus, with 6 having died. Brexit negotiations, which are due to resume next week, may need to be postponed if the outbreak worsens.
In his Budget statement to Parliament, Sunak promised a huge fiscal stimulus “to support British people, British jobs and British businesses through this moment.” It will be accompanied by the biggest jump in borrowing since 2013, and the largest tax-and-spending giveaway since 1992.
“I know how worried people are,” Sunak told the House of Commons. “We are doing everything we can to keep this country, and our people, healthy and financially secure.”
The coordinated response from the U.K. central bank and government underlines the scale of the threat the virus poses to the global economy. The Italian government pledged $28.3 billion to combat the epidemic, while the European Central Bank warned of a 2008-style crisis and German Chancellor Angela Merkel pledged to do “whatever is necessary” to weather the storm.
Growth Stalls
Sunak’s first Budget comes at a critical time for the British economy, which unexpectedly stalled in January, even before any impact of the virus could be felt. The outbreak adds to pressure on businesses, which are already worried about a return to tariffs and quotas and disrupted supply chains if Johnson fails to strike a new trade deal with the European Union by the end of 2020.
Business Gives Sunak Thumbs Up on Virus, Thumbs Down on Brexit
Whatever happens with Brexit talks, Sunak warned the virus will inevitably lead to a reduction in consumer spending. But he said he was in “constant communication” with the Bank of England over the “coordinated” and “comprehensive” response to the virus.
The chancellor set out his multi-billion pound three-point plan, including 7 billion pounds to support businesses and individuals:
- The National Health Service will get “whatever it needs, whatever it costs,” with a 5 billion-pound emergency response fund immediately for public services
- People will get financial support if they need it to cope with the virus, with statutory sick pay for everyone who’s been told to self-isolate, and more generous welfare rules
- Supporting businesses: government to refund sick pay bills for 14 days in full, for 2 million companies with fewer than 250 employees.
Markets Underwhelmed
The budget and the bank’s emergency rate cut failed to buoy financial markets worried about the scale of the virus shock to the economy and the absence of U.S. stimulus measures. The FTSE 100 Index for stocks reversed earlier gains, trading 0.7% lower at 2:55 p.m. In London. The pound trimmed gains.
Britain’s Debt Management Office said it plans to issue 156 billion pounds of gilts in the 2020-21 fiscal year. That’s the most since 2013 and still doesn’t take into account the emergency funds needed for the coronavirus response. Yet it’s less than forecast and interest rates are at record lows.
Questions remained over how exactly the government will pay for the package. While borrowing will rise, around 5 billion pounds of the targeted virus response measures will come from the government’s emergency reserve funds.
For Sunak, 39, it is a baptism of fire. He has been in the most senior finance minister’s post for only 27 days, after his predecessor quit following a disastrous clash with Johnson.
Businesses fear the impact of the virus could be catastrophic. As many as one in five workers will potentially be forced to stay at home sick, according to officials.
Overshadowed
Wednesday’s budget was meant to be the moment Johnson’s government unveiled its great vision. After winning a large majority in last December’s election, his Conservative administration has set out to reorder the U.K. economy, reviving regions of the country that have been “left behind” by faster growth in London and the south.
Instead, the details of Johnson’s most ambitious plans have been postponed as the emergency response to the virus crisis dominates the government’s agenda.
In a sign of the scale of the challenge ahead, the chancellor announced downgrades to official growth forecasts -- which do not take into account the full extent of the virus’s impact. The estimate for 2020 expansion was lowered to 1.1% -- which would be the worst since the financial crisis -- and 2021’s to 1.8%.
Sunak insisted his plans will meet his fiscal rules, with room to spare, despite concerns over how he will pay for his pledges. Crucially, the Office for Budget Responsibility, an independent body that produces fiscal forecasts for the chancellor, has not had a chance to assess his massive stimulus package, or the impact of the virus on the economy.
Sunak insisted his statement delivers on the key promises the Tories made to austerity-weary voters last year. He’s unveiling a record 600 billion pound spending program on infrastructure across the country, targeted on roads, railways, housing, digital connectivity and research and development.
In other measures announced in Sunak’s Budget:
- The threshold for paying National Insurance will be increased from 8,632 pounds to 9,500 pounds, “a tax cut for 31 million people,” typically worth 104 pounds per person
- Public spending will be 100 billion higher over the next five years
- 800 million pounds to establish two or more new carbon capture and storage clusters, creating 6,000 jobs
- Entrepreneurs’ tax relief will be reduced but not be fully abolished, despite speculation it would be axed
- Research and development investment will be raised to 22 billion a year
- Fuel duty will be frozen for another year and a planned rise in beer duty will be canceled
- More investment in transport infrastructure across the U.K., and extra spending on broadband
--With assistance from Dana El Baltaji, Zoe Schneeweiss, Lucy Meakin, David Goodman, Andrew Atkinson, Stuart Biggs, Olivia Konotey-Ahulu, Eddie Spence, Alex Morales, Kitty Donaldson, Thomas Penny, Robert Hutton and Tiago Ramos Alfaro.
To contact the reporters on this story: Tim Ross in London at tross54@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net
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