The cost of Covid-19: How does pandemic borrowing add up?

In 2020, the government spent an unprecedented amount supporting the economy through the Covid-19 pandemic. The economic consequences are expected to be felt for years to come and will no doubt influence policy that will affect personal finances.

For the 2020/21 tax year, public sector net borrowing – the difference between public spending and total receipts from tax and other sources – was £394 billion. That’s a huge £339 billion higher than anticipated when Covid-19 restrictions were first put in place in March 2020.

The significant deficit is down to a combination of changes in the economy and paying for government measures, like the Coronavirus Job Retention Scheme.

According to the Institute for Government, £82 billion has been used to support households, £71 billion has gone to supporting businesses, and an additional £127 billion has been used to deliver Covid-19 public services.

However, on top of these expenses, restrictions also affected the economy, leading to tax revenues falling by £106 billion. This includes taxes falling in a range of areas, from business rates falling by 39% to fuel duty falling 21% as families were told to stay at home. The UK now faces its largest deficit in peacetime.

Over the coming years, the government will have to make some tough decisions about how they’ll repay the amount borrowed.

Covid-19 restrictions led to the worst recession in 300 years

The social distancing restrictions put in place to limit the spread of the virus forced many businesses to close or severely restrict operations. This caused economic activity to plummet in the second quarter of 2020 by 22% when compared to the end of 2019. Overall, 2020 economic activity was 9.9% lower than the previous year.

The most significant recession before this was over 300 years ago, when temperatures in the UK plunged to around -12˚ Celsius. This “Great Frost” of 1709 caused widespread flooding, devastated agriculture, and caused further hardship.

While we don’t have to contend with flooding after the pandemic, there will be other challenges. The Office for Budget Responsibility (OBR) predicts a long-lasting impact. Even in 2025, the economy is expected to be 3% smaller – around £40 billion less – than it would otherwise have been.

The ongoing impact is despite the government’s decision to spend now to limit long-term costs. For example, by supporting businesses through the Job Retention Scheme (furlough scheme) it’s hoped that the economy will be able to recover quicker as restrictions ease and job losses are minimised. If the economic output was to shrink by 3% despite these steps, national income would fall by around £70 billion.

Of course, the pandemic is still affecting lives and the economy now. The vaccine programme has meant the UK has started to lift restrictions, but further waves could mean more time in lockdown. As a result, it’s difficult to predict how Covid-19 will affect the economy in the long term or even this year.

Paying back the cost of Covid-19

As the vaccine is rolled out and health concerns lessen, attention is now turning to how the UK will pay back the money.

Despite rumours, the chancellor did not increase taxes affecting personal finance in this year’s Budget. However, he did bring in widespread allowance freezes for five years, effectively increasing taxes in real terms. It’s important these freezes are part of your financial plan as they could affect your tax liability in the coming years.

It’s still expected that some taxes will have to increase once the pandemic has passed to plug the gap left in public finances.

In his Budget speech, chancellor Rishi Sunak said: “The amount we’ve borrowed is comparable only with the amount we borrowed during the two world wars. It is going to be the work of many governments, over many decades, to pay it back. Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

While we can’t predict how allowances and taxes will change in the coming years, it is important that individuals ensure their financial plans continue to reflect announcements. Making use of allowances to manage tax liability and ensuring you’re on sound financial footing can put you in a strong position even as we start to pay back the cost of Covid-19. It’s important you carry out regular reviews of your plan to incorporate any changes that are announced.

If you’d like the help of a finance professional when reviewing your plan or have questions about what changes mean for you, please give us a call.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.


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