Britain injects $91 billion fund to prop up virus-hit economy

Britain’s treasury chief on Wednesday announced an additional 65 billion pounds ($91 billion) of support for an economy ravaged by the coronavirus pandemic, extending job support programs and temporary tax cuts to help workers and businesses in his annual budget.

Rishi Sunak said his plans for the next fiscal year would “protect the jobs and livelihoods of the British people” through September as the government slowly lifts lockdown restrictions that have shut businesses across the UK.

While the pandemic has pushed public borrowing to levels not seen since World War II, Sunak said it is too soon to cut government spending. The British economy has shrunk by 10% over the past year and more than 700,000 people have lost their jobs. Projections released on Wednesday by the Office for Budge Responsibility show that the economy will still be 3% smaller five years from now than it would have otherwise been.

But Sunak said the government must start to get its finances in order so it doesn’t saddle future generations with unmanageable debt. To do so, he announced plans to increase the rate of corporation tax to 25% in 2023 from 19% and freeze personal income tax thresholds, increasing revenue as inflation boosts incomes.

“An important moment is upon us,” Sunak told the House of Commons. “A moment of challenge and of change. Of difficulties, yes, but of possibilities, too. This is a budget that meets that moment.”

Former International Monetary Fund chief economist Ken Rogoff compared the pandemic to a war and said the government should be looking at catastrophe relief.

“We are in the middle of a war and you should not be worrying excessively about the budget deficit and about debt,’’ he told the BBC about his advice to Sunak. “You can worry about that at the other side.’’

Delivering an annual budget speech on Wednesday, Sunak said the economy will regain its pre-pandemic size in mid-2022, six months earlier than previously forecast, helped by Europe’s fastest vaccination programme.

But it will remain 3% smaller in five years’ time than it would have been without the health shock and extra support is needed now as the country remains under coronavirus restrictions, he said.

“First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis,” Sunak told parliament.

“Second, once we are on the way to recovery, we will need to begin fixing the public finances - and I want to be honest today about our plans to do that. And, third, in today’s Budget we begin the work of building our future economy.”

Among new support measures were a five-month extension of Britain’s huge jobs rescue plan and more help for the self-employed, the continuation of an emergency increase in welfare payments, and an extended VAT cut for the hospitality sector.

A business rates exemption for retail, hospitality and leisure businesses was extended until the end of June, by when Prime Minister Boris Johnson hopes he will have lifted most COVID-19 restrictions.

An existing tax break for home-buyers will also now run until June 30 and will then apply for cheaper homes until the end of September.

Sunak will borrow significantly more in the coming financial year than thought just a few months ago - 234 billion pounds, or 10.3% of gross domestic product, compared with a previous estimate of 164.2 billion pounds, or 7.4% of GDP.

British government bond prices fell sharply, with 10-year gilt yields rising more than 8 basis points. The Debt Management Office said it planned to sell 296 billion pounds of gilts over the coming year, well above the 247 billion pounds markets had expected in a Reuters poll.

To bring borrowing under control, Sunak announced future tax rises that will increase the tax burden to its highest level since the 1960s, rising from 34 to 35% of GDP by the middle of this decade.

“Chancellor Sunak confirmed earlier reports that the government will start introducing some fiscal austerity measures in an attempt to boost the UK fiscal outlook,” Valentin Marinov, head of G10 foreign exchange research at Credit Agricole, said.

“The UK is thus to become the first major economy to consider such measures.”

Britain has suffered the biggest COVID-19 death toll in Europe and its economy has been the worst hit among big rich countries, shrinking by 10% last year, its worst slump in three centuries.

Many companies are also under strain from Brexit after Britain left the European Union’s single market on Jan. 1, and the government faces the challenge of huge investment to meet its promise to create a net zero carbon economy by 2050.

Announcing forecasts by the Office for Budgetary Responsibility (OBR), Sunak said the economy was likely to grow 4% in 2021, slower than a forecast of 5.5% made in November, reflecting the current lockdown which began in January.

Looking further ahead, the OBR forecast GDP would grow by 7.3%, 1.7% and 1.6% in 2022, 2023 and 2024 respectively. In November, the OBR had forecast growth in those years of 6.6%, 2.3% and 1.7%.