As the FT has noted this morning:
Rishi Sunak has vowed to take “firm action to support families, businesses and the public services” in response to the spread of coronavirus when he presents his first Budget on March 11.
The Budget was supposed to showcase a new economic vision for Britain but as the country braces itself for the fallout from the outbreak, the newly appointed chancellor is having to rework the statement to convey a sense of “security”.
Rishi Sunak would be wise to consider all such measures. But he needs to do something much more than that. He needs to prepare for government deficits on the scale of 2008 to 2010, because the chance that they are going to happen is very high. There are three reasons for saying so.
First, the chance that we will avoid a quite significant recession as a result of coronavirus now look to be remote. Right now the issues are supply side: it is already apparent that some products originating in China are going to be in quite short supply for a while. This is only going to get worse. But then the demand side issues will kick in as people cut their spending. Fear alone always does this. Enforced inactivity will greatly exacerbate the trend. Government revenues will fall substantially as a result.
Second, what are called the automatic multipliers with regard to government spending will kick in. The NHS is going to need a great deal of money. So too will statutory sick pay budgets. And I hate to say it, but some employers will not make it through this crisis: unemployment will rise if this lasts more than a week or two, as looks likely now.
Third, the tax gap will increase enormously. Tax that is due will simply not be paid. Partly that will be with government consent. Partly it will be because there will be insolvencies. And since the tax gap is measured in cash terms, this will show as deficits, which the bad debt will be, as a matter of fact.
There was until recently talk of a Brexit cliff edge. That may still happen. But before then there may well be one induced by coronavirus instead. And the descent into government deficits might be very rapid indeed.
Let’s be clear: no one would wish this to happen. My concern that it is likely again arises for three reasons.
The first is that the Tories have persuaded themselves that government finances can be controlled. They have had to believe this to blame Labour, quite inappropriately, for 2008. They are as a result wholly intellectually unprepared for what is to come.
Second, in that case I fear that a Tory led Treasury is ill suited to the task it faces, and may simply not react as appropriate.
And third, whilst there is a complete narrative that can suggest this will not be a crisis, in the form of modern monetary theory, the attacks upon it from right wing politicians and media who are all too prone to refer to the magic money tree, means that rolling this out as an explanation for policy may be harder than it should be.
We face hard times.
They will be made harder by a government ill-prepared for deficit management, which they deny can happen on their watch. That lack of preparedness might make hard times much harder than they need be.