Paying back the cost of Covid-19

[Horizon22]

As a member of the younger generation (under 30), I have a slight concern about the eventual costs of the provisions we're making in Covid-19. Now don't get me wrong, its absolutely fine and correct that we furlough staff, offer government loans etc to stop people losing entire livelihoods from which they may never recover (and even with the scheme they still may not).

Furloughing staff alone has cost approximately £8bn so far. Now the economy was not in a brilliant state anyway, and we have added a lot to the current debt (which was already rising). Is it irrational to think that these debts and costs will be picked up by our generation quite considerably? How long do you think this will be for?

 

[JonathanH]

In the government's favour on this is that the current cost of borrowing is pretty low and there are expected to be entities prepared to buy the debt even at these low yields.

The gilt issuance will take a variety of forms and be payable back over quite a range of different periods.
https://www.gov.uk/government/news/...bt-management-offices-financing-remit-2020-21
https://www.dmo.gov.uk/media/16478/sa230420.pdf

The UK already has a lot of debt but institutional investors (eg pension schemes) are encouraged to invest in it by the actions of regulators.

It is a little difficult to envisage how the government will go about raising the money to reduce this debt - The Prime Minister indicated his preference today not to try and recover the money from cutting spending - ie austerity (and there isn't a lot of scope to do this now). Key to all of this is trying to generate tax revenue, not only by increasing taxes but also trying to stimulate growth and innovation.

 

[Horizon22]

In the government's favour on this is that the current cost of borrowing is pretty low and there are expected to be entities prepared to buy the debt even at these low yields.

The gilt issuance will take a variety of forms and be payable back over quite a range of different periods.
https://www.gov.uk/government/news/...bt-management-offices-financing-remit-2020-21
https://www.dmo.gov.uk/media/16478/sa230420.pdf

That is indeed some relief - although honestly I don't truly understand gilts - but do you think it will be skewed to the long term?

 

[Bald Rick]

In the government's favour on this is that the current cost of borrowing is pretty low and there are expected to be entities prepared to buy the debt even at these low yields.

The gilt issuance will take a variety of forms and be payable back over quite a range of different periods.
https://www.gov.uk/government/news/...bt-management-offices-financing-remit-2020-21
https://www.dmo.gov.uk/media/16478/sa230420.pdf

The UK already has a lot of debt but institutional investors (eg pension schemes) are encouraged to invest in it by the actions of regulators.

It is a little difficult to envisage how the government will go about raising the money to reduce this debt - The Prime Minister indicated his preference today not to try and recover the money from cutting spending - ie austerity (and there isn't a lot of scope to do this now). Key to all of this is trying to generate tax revenue, not only by increasing taxes but also trying to stimulate growth and innovation.

Tax revenue is going to take a massive hit this year. Corporation taxes will fall significantly, same with income taxes, stamp duty, fuel duty, Air Passenger duty... the list is long.

 

[Clayton]

Tax revenue is going to take a massive hit this year. Corporation taxes will fall significantly, same with income taxes, stamp duty, fuel duty, Air Passenger duty... the list is long.

However there are plenty of folk on more than say 60K who could pay just a little more tax

 

[Bald Rick]

However there are plenty of folk on more than say 60K who could pay just a little more tax

Very roughly, one third of all income tax receipts are paid by the top 1.5% (450,000 people) who are additional rate taxpayers, ie earn over £150k. If the additional rate was lifted back up to 50%, that would gain somewhere around an extra £4bn a year.

If the higher rate of tax was lifted from 40 to 45%, you’d get about the same again. But these are big tax increases, and for higher rate tax payers it would hit the economy hard.

Far better for the economy, the environment, and the rail industry (in my opinion), would be 7p on a litre of fuel, which would also raise £4bn a year, assuming fuel consumption regains its pre-virus levels. Even then fuel would still be much cheaper than it was 2 months ago.

 

[Clayton]

Very roughly, one third of all income tax receipts are paid by the top 1.5% (450,000 people) who are additional rate taxpayers, ie earn over £150k. If the additional rate was lifted back up to 50%, that would gain somewhere around an extra £4bn a year.

If the higher rate of tax was lifted from 40 to 45%, you’d get about the same again. But these are big tax increases, and for higher rate tax payers it would hit the economy hard.

Far better for the economy, the environment, and the rail industry (in my opinion), would be 7p on a litre of fuel, which would also raise £4bn a year, assuming fuel consumption regains its pre-virus levels. Even then fuel would still be much cheaper than it was 2 months ago.

I mean sure it’ll be a combination of those sorts of things. The trouble with taxing products is that everyone, rich and poor, pays more.

 

[Crossover]

Furloughing staff alone has cost approximately £8bn so far. Now the economy was not in a brilliant state anyway, and we have added a lot to the current debt (which was already rising). Is it irrational to think that these debts and costs will be picked up by our generation quite considerably? How long do you think this will be for?

As a slight aside but on the point of this, I read or heard recently (this morning I think) that the debt from WW2 was only repaid a few years ago (under Gordon Brown in 2007 is sticking on my mind but I’m not sure it’s right)

I suspect the repercussions of the assistance ‘packages’ will be felt for a while, though I agree with you that it was the only real way forward (indeed a few friends had been put out of work (in sectors that had been ordered to close) before the furlough scheme was announced and were, understandably, worried)

 

[GRALISTAIR]

Far better for the economy, the environment, and the rail industry (in my opinion), would be 7p on a litre of fuel, which would also raise £4bn a year, assuming fuel consumption regains its pre-virus levels. Even then fuel would still be much cheaper than it was 2 months ago.

Exactly my preferred approach too.

 

[RailwayWannabe]

Very roughly, one third of all income tax receipts are paid by the top 1.5% (450,000 people) who are additional rate taxpayers, ie earn over £150k. If the additional rate was lifted back up to 50%, that would gain somewhere around an extra £4bn a year.

If the higher rate of tax was lifted from 40 to 45%, you’d get about the same again. But these are big tax increases, and for higher rate tax payers it would hit the economy hard.

Far better for the economy, the environment, and the rail industry (in my opinion), would be 7p on a litre of fuel, which would also raise £4bn a year, assuming fuel consumption regains its pre-virus levels. Even then fuel would still be much cheaper than it was 2 months ago.

Surely the fuel wouldn't be cheaper than it was two months ago because you are 'assuming fuel consumption regains pre virus levels' which would mean the crude price would be up again.

I think a fuel duty increase would stifle the economy, it puts people off travel and puts the price of all goods and services up, doesn't encourage consumer spending or industry.

I think fuel duty and VAT are already high, cars and HGVs are still economically favoured despite around 2/3 to 3/4 of the cost of a road going litre being tax. They also consume no subsidies. Vehicle excise duty and insurance tax also brings in cash to cover costs of road repair, some investment, and traffic offence policing.
I believe spending cuts, cutting spending on big vanity projects, accepting that 'lockdowns' and their 'furloughs' can't go on indefinetly (whilst there's still no cure in sight), and taxes elsewhere will have to be the way to go.

 

[Bantamzen]

As a member of the younger generation (under 30), I have a slight concern about the eventual costs of the provisions we're making in Covid-19. Now don't get me wrong, its absolutely fine and correct that we furlough staff, offer government loans etc to stop people losing entire livelihoods from which they may never recover (and even with the scheme they still may not).

Furloughing staff alone has cost approximately £8bn so far. Now the economy was not in a brilliant state anyway, and we have added a lot to the current debt (which was already rising). Is it irrational to think that these debts and costs will be picked up by our generation quite considerably? How long do you think this will be for?

Current estimates for the 3 months the scheme was originally planned for are between £40-50 billion.

Tax revenue is going to take a massive hit this year. Corporation taxes will fall significantly, same with income taxes, stamp duty, fuel duty, Air Passenger duty... the list is long.

The list is indeed long, and scary.

As to how to pay for it? Well I think we all know the answer to this. Higher taxation, cutbacks in services including the NHS, major projects culled, and so on. There will of course be a period of bravado from the government, they will talk about grandiose new projects to simulate growth, then engage in years worth of consultations whilst quietly axing as much as they can. If this all sounds cynical, then it is. But 30+ years in the public sector has taught me that the people that pay for things like this tend to be the people that can afford it the least. I hope I am wrong, but I am confident that I am not.

 

[HH]

As to how to pay for it? Well I think we all know the answer to this. Higher taxation, cutbacks in services including the NHS, major projects culled, and so on. There will of course be a period of bravado from the government, they will talk about grandiose new projects to simulate growth, then engage in years worth of consultations whilst quietly axing as much as they can. If this all sounds cynical, then it is. But 30+ years in the public sector has taught me that the people that pay for things like this tend to be the people that can afford it the least. I hope I am wrong, but I am confident that I am not.

They will not be allowed to cut the NHS. Nor do I think they will want to. Government spend will need to increase to make up the shortfall in private spending. The most logical ways to spend that money are on capital projects (as after the great depression).

Taxes are going to see a big hike; I suspect right across the board. They'll have to. I'm sure the Treasury is working flat out to come up with a package that has maximum revenue for minimum political fallout. Maybe they'll have an NHS surcharge on NI, for example - I mean who's going to object to that?

 

[Bantamzen]

They will not be allowed to cut the NHS. Nor do I think they will want to. Government spend will need to increase to make up the shortfall in private spending. The most logical ways to spend that money are on capital projects (as after the great depression).

Don't be so sure.

Taxes are going to see a big hike; I suspect right across the board. They'll have to. I'm sure the Treasury is working flat out to come up with a package that has maximum revenue for minimum political fallout. Maybe they'll have an NHS surcharge on NI, for example - I mean who's going to object to that?

In the short term very few, but any increase will hit the poorest hardest, and these are going to be the same people already hit from reduced income during this crisis.

 

[Hadders]

I don't know what will end up happening but if you increase taxes too much then people have less to spend. We need people to spend to fuel the economy. There's a danger of a vicious circle.

Arguably it's better to reduce tax to stimulate spending and keep the wheels of the economy turning, keep people in jobs and companies going etc.

 

[HH]

Don't be so sure.

In the short term very few, but any increase will hit the poorest hardest, and these are going to be the same people already hit from reduced income during this crisis.

I'm not sure of anything. That is my opinion.

I think the government will try very hard to not to noticeably hit the poorest and there are plenty of ways in which any direct tax could miss those people.

 

[deltic]

The Bank of England can just print money (or in reality transfer it electronically to the government's bank account) to pay for all the short term measures required. It doesnt need to be paid back. If done for to long it creates hyper inflation as in inter-war Germany or more recently Zimbabwe but for a one off event like Covid 19 it can be done. Hong Kong Central Bank was ordered to make an electronic transfer to all citizens to address its short term economic issues.

David McWilliams an Irish Economist who previously worked for the Bank of Ireland has argued for this - see http://www.davidmcwilliams.ie/why-central-bank-must-give-everyone-free-money-right-now/

 

[Bletchleyite]

In the short term very few, but any increase will hit the poorest hardest, and these are going to be the same people already hit from reduced income during this crisis.

One thing they could do is remove the National Insurance ceiling. That wouldn't mean a headline percentage and would mean the better-off paying more. That would then give scope to align it with Income Tax and merge the two at some later stage.

 

[JonathanH]

One other aspect of future costs for the government that won't lie down is the clamour for above inflation pay increases for people working in the public sector.

Suppression of pay increases was a key aspect of 'austerity'. There have been quite a few calls for the pay of nurses to increase during this crisis.

 

[scotrail158713]

Don't be so sure.

In the short term I’d agree - I can’t see them initially making cuts. It’d be political suicide to be clapping for the wonders they’ve done one day, and then the next day be making cuts. However I do think they will end up making cuts at some point - it might just be a year or two down the line.

 

[Bletchleyite]

One other aspect of future costs for the government that won't lie down is the clamour for above inflation pay increases for people working in the public sector.

Suppression of pay increases was a key aspect of 'austerity'. There have been quite a few calls for the pay of nurses to increase during this crisis.

Yes, I think nursing needs paying as the professional job it is. Paramedics are also heavily undervalued for what they do.

 

[Bald Rick]

Surely the fuel wouldn't be cheaper than it was two months ago because you are 'assuming fuel consumption regains pre virus levels' which would mean the crude price would be up again.

Sure the crude price would rise again as demand rises, but not all the way back. Firstly, demand for all oil products won’t return to normal levels for several years - not least reduced demand for jet fuel, and other oil products used in industry which will take a hit in line with economic activity. Secondly, road fuel use will take a while to get back to normal - again in line with the loss of economic activity (and of course this will affect the extra revenue an increase in fuel duty would bring). Thirdly, pretty much every storage facility worldwide that can take oil products (including crude) is currently full. That excess supply will take several months to unwind, and will further suppress the price. The oil price won’t be back above $50 for a long time. The oil futures 18months hence are only at around $35.

I fundamentally disagree with you about fuel duty stifling the economy. It rose almost every year through the 80s, 90s, and 00s, during which time the economy more than doubled in real terms. Fuel duty has not risen since 2012; had it risen simply in line with inflation since then, the government would have another £12bn a year to play with now.

 

[Mojo]

Taxes are going to see a big hike; I suspect right across the board. They'll have to. I'm sure the Treasury is working flat out to come up with a package that has maximum revenue for minimum political fallout. Maybe they'll have an NHS surcharge on NI, for example - I mean who's going to object to that?

In a way, I can see some sort of extra tax being introduced with its contributions ringfenced towards the NHS, similar to the social care precept that many local authorities have chosen to charge as part of our council tax.

I think not hiking fuel duty now, whilst the price of fuel at the pumps is now approaching the lows of Dec 15/Jan 16 is a bit silly.

Sadly I think Boris’ pledge to the party whilst campaigning to be leader last year, of increasing the higher rate to £80k is now gone, given how much things have changed, not only in terms of wanting to end “austerity” but also now having all this money to pay back!

 

[Bletchleyite]

The problem with ringfencing is that it's meaningless, you can just remove some other non-ringfenced funding to make up for it.

One thing we could do if we wanted to seriously do that is to get rid of NI and separate out NHS funding so you could have a "health levy" and a "care levy" as separate percentages, each would fully fund that aspect with none of it coming from general taxation.

 

[JonathanH]

I don't know what will end up happening but if you increase taxes too much then people have less to spend. We need people to spend to fuel the economy.

From a 'green' perspective, we actually need a massive reduction in consumption. Spending to fuel the economy is not wholly consistent with the 'climate change' agenda. I'm not sure what the 'right' spending is.

 

[Mojo]

The problem with ringfencing is that it's meaningless, you can just remove some other non-ringfenced funding to make up for it.

That’s exactly the point!

 

[HLE]

The cries of some journalists to end the furlough scheme makes me chuckle. Some industries have effectively been shut down, and will remain all but shut for months to come. Events, hospitality, sport won't go back to normal anytime soon and it's the backroom and front facing staff that while those businesses are closed that don't have a job to go back to, as it stands.

I agree that quite a proportion of businesses have used and abused the scheme, and that it should be dwindled down to those industries that remain shut, or the percentage reduced for those that are currently on it to ease them back into work.

The idea of UBI is ridiculous though. I'd much rather the furlough scheme kept people that can't go to work, in a job that they'll hopefully be able to return to. It's their tax receipts that will ultimately contribute to reducing the deficit in years to come, and if that's achieved, and it's a big if, the government of the day can then look at how we pay the debt back. UBI just smacks of communism.

 

[Bald Rick]

One other aspect of future costs for the government that won't lie down is the clamour for above inflation pay increases for people working in the public sector.

Suppression of pay increases was a key aspect of 'austerity'. There have been quite a few calls for the pay of nurses to increase during this crisis.

Pay will be suppressed for some time - the unemployment rate will see to that.

 

[brad465]

I'm not sure exactly how much this will raise and this I admit is ambitious to achieve, but the elephant in the room when it comes to public finance struggles is tax avoidance, in particular the abuse of tax havens by the richest individuals and corporations to avoid paying the UK proper tax revenue (and other world governments for that matter).

Tax rises will still be needed in general, but there really needs to be consideration to end abuse of tax havens worldwide to stop this morally wrong behaviour from going on, now more than ever. This could be by either closing them down (i.e. charging full tax rates compared to their dependency country's rate), or if the locals do need tax relief still, then a cap on low/nil tax rates at a threshold where many low income residents are supported, but billionaires, large corporations, etc. would still be forced to pay fairly.

 

[RailwayWannabe]

Sure the crude price would rise again as demand rises, but not all the way back. Firstly, demand for all oil products won’t return to normal levels for several years - not least reduced demand for jet fuel, and other oil products used in industry which will take a hit in line with economic activity. Secondly, road fuel use will take a while to get back to normal - again in line with the loss of economic activity (and of course this will affect the extra revenue an increase in fuel duty would bring). Thirdly, pretty much every storage facility worldwide that can take oil products (including crude) is currently full. That excess supply will take several months to unwind, and will further suppress the price. The oil price won’t be back above $50 for a long time. The oil futures 18months hence are only at around $35.

I fundamentally disagree with you about fuel duty stifling the economy. It rose almost every year through the 80s, 90s, and 00s, during which time the economy more than doubled in real terms. Fuel duty has not risen since 2012; had it risen simply in line with inflation since then, the government would have another £12bn a year to play with now.

Well then if 'road use fuel' will take a while to get back to normal, then even '7p' on a litre wouldn't bring in the '£4bn a year.'

Fuel duty increases hit everyone, including the poorest, either directly or indirectly.
It only disproportionately hits against those who do lots of miles, and those in the niche specialist sports car industry and its well off patrons; oh and of course the poorer working classes in semi-rural places far away from our metropolises who over the last 4 decades have suffered from a lack of government support for their strategically important heavy industries, such as ship building, steel industry, some of the locomotive building towns, coal mining, heavy industrial etc. Maybe some extra tariffs on far eastern steel etc. would help here if the government wasn't scared of us having to weather a storm in prices of goods coming in, in order to protect our strategic ability to be able to negotiate in the future based on our heavy industries still existing. I think fuel duty hike of 7p would be another undeserved blow for the semi rural communities.

In a way I could see the rich in places like suburbs and cities being able to mitigate against high fuel duty hikes by buying the most expensive electric cars whilst those out in the regions are stuck with their second-hand, old cars, with the ability to refuel quickly a necessity miles in the sticks.

I would argue that the economy rose through the 80s, and particularly the 90s and 00s (pre crash) despite, and not because of fuel duty hikes. I would presume the economy rising would be down to unsustainable levels of immigration fuelling growth, booming aerospace and motor industry (albeit sadly foreign owned), cheap imports of consumer goods, cheap global food prices, electricals, and industrial goods, and fairly cheap government borrowing because of impressive GDP figures. And also because of innovation and robotics in factories / good productivity improvements pre 09 etc

 

[Qwerty133]

It's time to reduce the state pension, not only in real terms, but in nominal terms. The level of the state pension should be the same as the level of universal credit that would be paid to working age people in the same circumstances. It is also time to look at reducing the levels of farming subsidies paid to people who aren't even using the land for farming but rather to enable horse racing or similar activities. I would also like to see a specific tax on TV rights revenues for sporting and other major events, with 50% of the revenue from such being used to support sports with a smaller revenue stream and the rest entering the general pool. It will also be necessary to end the Barnet formula and substantially reduce funding to Scotland to a level that is more consistent with spending in England. There also has to be measures put in place to prevent foreign investors further pushing up the property prices by purchasing properties than they have no intentions of living in and I would like to see a 100% tax put in place for such individuals.
It will also be inevitable that income tax and NI increase and I believe the best way of doing such is increasing the personal allowance so that those on minimum wage don't pay any tax at all while increasing the basic rate to 25% and the higher rate to 45%, and also having flexible thresholds depending on the hours worked per week so that those working part time pay the same proportion of their income in tax as their full time colleagues. Unfortunately the current system has led to many expensive to train public sector professionals to choose to work part time (such as doctors and senior nurses) and something has to be done to increase the incentives for working full time in these areas and the perverse law currently forces the take home way to work out greater per hour for part time rather than full time workers which is simply unacceptable when full time work is more beneficial for the economy.