Boris Johnson’s Next Headache Is How To Pay For The Pandemic

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Follow the money. That line from All The President’s Men has ever since been a pretty good guide to a lot of politics ever since, on both sides of the Atlantic. And as the row continues over Boris Johnson’s ‘big bang’ removal of Covid restrictions on July 19, all the prime minister’s men (and women) are switching focus to the financial and economic consequences of the pandemic.

After spending unprecedented peacetime sums on direct wage support, the Treasury is obviously keen to start balancing the books as soon as possible. Last month, the most significant clue that the PM would not allow further delay beyond July 19 came not in any Department of Health announcement but in Rishi Sunak ruling out any change to his timetable for furlough.

Indeed, despite the four-week extension of lockdown, the state’s element of furlough support was cut as planned on July 1. With struggling hospitality firms forced to find extra cash to support workers, it would have been politically unsustainable to further extend lockdown at the same time as Treasury help was withdrawn. The full removal of furlough by the end of September is another reminder of Sunak’s determination to start going ‘back to normal’.

Economic issues certainly dominated the cabinet meeting today, with Sunak leading the discussion to mark nearly a year since his ‘Plan for Jobs’ was unveiled. He also pointed to the fourth month in a row of falling unemployment, and new OBR figures showing two million fewer people were out of work compared to their original forecast.

Liz Truss gave an update on a new Global Investment Summit in October, building on the new giga-battery factory investment in Sunderland. Business secretary Kwasi Kwarteng told colleagues of his forthcoming “innovation strategy”. So, it’s easy to see why the PM summed up at the end by telling his cabinet that “jobs, investment and innovation” would be at the core of his government’s mission “as we emerge from this pandemic”.

But even as the chancellor cited the OBR, there was less welcome news from the watchdog in its latest “fiscal risks” report, which warned he would have to find £10bn a year to fund a black hole on health, education and transport spending caused by the pandemic. Health alone needs £7bn more than current plans allow.

As well as the pandemic, record public debt and climate change (or rather a failure to act early enough on climate change) were the other big risks, the OBR said. No.10 insisted the figures were merely “illustrative”, but those ministers and Tory MPs who back carbon taxes will have been emboldened by predictions that delaying climate action will cost more in the long term.

The black hole in the public finances looks all the more stark when set against the £37bn earmarked for Test and Trace for two years. Which is why I suspect the Treasury will end up raiding that budget as the number of tests actually decreases in coming months (the Test and Trace budget is already underspent for last year, though few have noticed).

Meanwhile, Gavin Williamson confirmed under-18s who had contact with positive Covid cases would no longer need to isolate from August 16. Sajid Javid said adults with two jabs would also be free of the need to isolate, and would not need regular testing to remain free either (such people would be ‘advised’ to take one PCR test, not a daily lateral flow test).

Of course, simply allowing many more people to avoid isolation will be welcome news not just for the individual but also for the Treasury. More people can keep earning and, surely not a coincidence, there will be less demand for people to be paid by the state to stay at home. Sunak strongly resisted calls from people like Jeremy Hunt to offer a simple salary-replacement payment to encourage more people not to infect others.

If you’re worried about losing income from being forced into self-quarantine, you do indeed ‘follow the money’ – via your wages, because the Treasury isn’t going to offer the generous sick pay many have called for. Yet with spending cuts ruled out by the PM, he and Sunak are going to have to work out whether they tax more or borrow more.

The third option of funding public services from ‘the proceeds of growth’ looks unlikely, with anaemic growth rates forecast once the ‘bounceback’ runs its course this year and next. With inflation causing jitters about servicing the current debt mountain, it may be that Tory tax rises (perhaps with the cover of climate change) become a reality.

The PM is taking a risk on unlocking a country with soaring case rates, but the OBR warning shows he faces equally difficult calls on the public finances – even if his public health gamble pays off. Get it wrong and both our health and wealth will suffer from yet another winter lockdown.

That’s why perhaps the most damaging OBR data was this: the UK fall in GDP in 2020 was the second worst behind Spain and the worst in the G7. Johnson messaged Dominic Cummings last year that the UK could end up with “the double distinction of being the European country with the most fatalities and the biggest economic hit”.

Though the UK is not quite the worst, we are certainly near the top of the wrong kind of league tables. The PM will be hoping the feelgood factor of England winning the Euro football championship helps him politically, and everyone is desperate to have some kind of summer joy after our long, long hibernation. But the facts of life of the UK’s finances are as tricky for him as the facts of death of our Covid record.

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