U.K. Budget Watchdog Says Sunak May Struggle to End Covid Costs

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Britain’s fiscal policy watchdog raised fresh doubts about whether Chancellor of the Exchequer Rishi Sunak will be able to keep to his spending plans.

The Treasury’s budget last week set aside no resources beyond next March to cover Covid-related costs such as re-vaccination and test-and-trace programs. The risk is that those expenses will persist, forcing Sunak to raise taxes in order to rein in the budget deficit.

“From what we can see the government only has a plan that gets to the end of 2021,” Richard Hughes, chairman of the Office for Budget Responsibility, told lawmakers. “We see a pretty long list of legacy costs coming out of this pandemic and very little evidence of explicit provision to meet those costs.”

According to OBR calculations, the big tax rises announced in the budget will barely deliver Sunak’s ambition to balance day-to-day spending and revenue by the middle of the decade.

Other risks to the public finances include the costs of catch-up schooling and propping up public transport as the economy recovers, Hughes said. There’s also a danger the National Health Service will face costs for segregating Covid and non-Covid patients, and for clearing a backlog of routine operations, he said.

‘Only Fog’

The OBR’s work is also hampered by the government for now sticking to one-year plans for departmental spending, instead of multi-year plans, Hughes said. The next spending round is due in the fall.

“It certainly makes our job more difficult when assessing the credibility of the government’s fiscal plans when essentially there is only fog beyond March 2022,” Hughes said.

Speaking to the same panel, OBR member Charlie Bean sought to temper any expectations that Britons will embark on a big spending splurge after building up an estimated 180 billion pounds ($250 billion) of savings in the absence of opportunities to spend during the pandemic.

“The idea that people will make up for their lost consumption by spending it all over the next few quarters once the economy has reopened, I find implausible,” Bean said. “It’s much more plausible that it will be spread out over several years.”

Bean estimated the public might spend about 5% of the saved amount per year on average in coming years, with delayed purchases of big-ticket items including cars and white goods boosting spending in the first year.

Bean and Hughes pointed to the loss of foreign workers as a risk to the potential of the economy, since growth has been powered by high levels of immigration from the European Union since the early 2000s.

“If they don’t return, or their compatriots don’t return to replace the lost workforce then that could have a longer term impact on the workforce that will be working in future, be able to be taxes and be able to support the population,” Hughes said.

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