As vaccination for Covid-19 gets under way, it feels like we have turned a corner. However, continuing Government support for individuals and families remains vital because it protects people’s lives today, and it also means the economy is better prepared to recover tomorrow.
Resolution Foundation analysis of recent Government forecasts shows that the total cost of all the Covid support schemes will be some £335 billion by the end of next year. But, before we even consider that cost, we should think about the alternative. Imagine a world in which there was no extra healthcare spending, or the virus ran rampant because there was no furlough scheme or lockdown. That would have seen a far greater and incalculable cost to society. The economic cost of Covid was high, but it could have been much worse.
The Government has funded all of this extra spending with more borrowing. In the future, it has three options of what it can do with this increased stock of debt, with its decisions likely to have a profound impact on almost all of our lives.
First, it could choose to cut public spending. The Spending Review in November gave a hint of this, with a public sector pay freeze, and a cut to normal public spending of £10 billion from next year. From April, Universal Credit benefit is also set to fall by £20 per week – hitting some of the poorest households in the UK.
Secondly, the Government can raise taxes. There is no doubt this would not be universally popular, but opinion polls now suggest that more people would rather see tax rises than cuts to public spending.
Thirdly, it can do nothing at all. The Government is able to borrow at record low interest rates, and that means that despite Government debt forecast to rise to some 105 per cent of GDP next year, the cost of paying for that debt has fallen to a record low. Far from spiralling out of control, the national debt is forecast to peak below 110 per cent of GDP, and even fall in future years. This means that while interest rates remain low, the Government can avoid spending cuts or tax rises.
One word of caution though: one day interest rates may rise again.