The Telegraph have a scoop this morning with a leaked Treasury document that reveals official thinking about the debt the nation is piling up at a rate of knots while the lock down is in force. Millions of workers are furloughed and funded mainly by a state whose income has collapsed. It is a sobering document for a government also planning to tip the stricken economy over a cliff in December. It might knock some sense into the heads of cabinet ministers who have been happy to go along with Johnson's reckless plans - up to now.
Remember, the 2009-10 financial crash cost a deficit in that year of £152 billion - an absolutely massive figure at the time but now looking like a cut-price recession if ever there was one. Who knew that Brown and Darling were being so cheap?
The Treasury document actually talks seriously about a "sovereign debt crisis" as a "plausible" possibility.
The Treasury’s analysis marked “official – market sensitive” estimates the crisis will cost the exchequer £300 billion in 2020-21 alone and require “an increase in income tax, the end of the triple-lock on state pension increases and a two-year public sector pay freeze.”
The document is dated May 5 and forecasts that Britain will have a £337bn budget deficit this year compared with the £55 billion forecast in March’s budget. Described as the “base case,” it represents what the Treasury expected to happen at the beginning of the month. Since then the furloughing scheme has been extended to October.
The paper says that tax rises and spending cuts raising between £25bn and £30bn, equivalent to a 5p increase in the basic rate of income tax, would be needed to fund this level of increased debt.
The worst-case scenario (yes it could get even worse), could see the deficit reach £516 billion in the current year with a cumulative total of £1.19 trillion over five years and require annual tax rises up to £90 billion a year. Talk about eye watering!
Sunak is advised by officials that an announcement on how to fund the huge increase in spending may have to be made imminently – but that the tax and spend changes could be delayed to avoid derailing an economic recovery. It suggests that the Chancellor has already “indicated a preference for accepting a higher but broadly stable level of debt” after the crisis.
The most hair-raising part of the leaked document raises the possible but “plausible” risks of permanently higher levels of debt and a serious crisis similar to the 1976 bail-out by the International Monetary Fund.
The Telegraph helpfully explains that interest rates around the world and in the UK are currently at record lows, which has pushed down the Government’s bill for servicing its debt pile. The official assessment warns that a sudden fall in the pound or an inflation spike could send interest payments soaring as investor confidence in public finances disintegrates and UK debt is shunned.
The document adds: “In a worst-case scenario, this could lead to a liquidity crisis and ultimately a sovereign debt crisis. This is because debt repayments are manageable at the moment because interest rates are very low. We are now pushing debt to well over 100% of GPD I would think, and the risk is that investors may be more concerned about where their money goes and will demand higher interest rates.
Plus, all the other countries seeking bailouts to cover the cost of the pandemic will drive rates upwards anyway.
The government's Debt Management Office will be working overtime soon. Amid all of this the government is recklessly and doggedly sticking to the policy of not asking for an extension to the transition period. Civil servants, industry and commerce are all crying out for a delay but a dwindling band of die-hard (for you that is, not them) nutters seem intent on making the nation's long and painful recovery from coronavirus even longer and more painful.
It is sadistic and irrational ideology.
