Coronavirus (COVID-19): UK fiscal path – a new approach

The UK's policy response to the pandemic to date

The coronavirus pandemic has led to a significant contraction of economic activity and record levels of borrowing, as tax revenues have fallen and public spending has increased. As a result, the UK Government, jointly with the Bank of England and the Financial Conduct Authority, is implementing a range of policy measures unprecedented in the UK to support financially strained households, protect people's jobs and help otherwise viable businesses, while also providing sufficient funds for the NHS and other public services. This forms the backdrop against which to assess the outlook for the UK's public finances.

Fiscal policy response

The Office for Budget Responsibility (OBR) estimates that the fiscal aid provided by the UK Government to date will cost £132.6 billion, or around 7% of GDP, in 2020-21. This already exceeds the fiscal support provided at the height of the financial crisis in 2008-09 (0.6% of GDP in 2008-09 and 1.5% of GDP in 2009-10 respectively). The Government's employment support schemes for workers and the self-employed are by far the most costly element of the fiscal interventions, accounting for more than half of the costs, or around £69 billion (see Chart 1). The Scottish and UK Governments have also implemented a package of tax cuts and cash grants to businesses worth £28 billion, and a further £8 billion of support to households in the form of increases in welfare payments and sick pay.

Chart 1 Description

A chart showing the estimated costs of the UK Government fiscal response to COVID-19 in 2020-21. The Job Retention scheme is estimated to cost 54 billion pounds, and is the most costly element of all. Grants and tax cuts for businesses are estimated to be around 28 billion pounds, extra spending on the NHS and public services 17 billion pounds, and the income support for the self-employed 15 billion pounds.

The UK Government has also provided up to £330 billion (over 15% of GDP) of state-backed loan guarantees. While this will not have an immediate impact on the UK's public finances, it may add to government expenditure in the future if some businesses are unable to repay their loans and the guarantees are called upon, with current OBR estimates suggesting £7 billion of write-off costs for the loan guarantees and trade credit insurance.

Take up of the UK Government's emergency support schemes

It is already clear that these schemes have provided an important lifeline to businesses and households. As illustrated in Table 1, over 970,000 businesses in the UK have been successful in applying for the state backed loan schemes while 9.2 million jobs have been protected by the Job Retention Scheme.

Regional data published by HMRC show that 628,200 Scottish jobs, around 27% of the total Scottish workforce, have been furloughed under the Job Retention Scheme as of 31^st May. A total of 146,000 (70%) of eligible 207,000 self-employed individuals made a claim, with Scotland's take-up rate being equivalent to the UK.

How does the UK compare internationally?

Countries have adopted a mix of conventional fiscal measures, such as tax cuts and increases in welfare payments, as well as less conventional fiscal measures, such as liquidity support and loan guarantees to businesses, to address the crisis. In international terms, the UK has provided one of the most generous fiscal responses across the OECD, together with Japan, Germany and Italy (see Chart 2).

However, international comparisons need be treated with caution as they can reflect a number of factors, including the role and size of government, the fiscal space available, the depth of the crisis and the stringency of the containment measures taken. Further detail is available in Annex A.

Chart 2 Description

A chart showing the amount spent by 21 advanced economies on direct fiscal policy measures as well as liquidity support, relative to their GDP. The UK ranks fourth, with fiscal measures worth just over 20% of GDP. The fiscal response is largest in Japan, at over 40% of GDP, followed by Germany at almost 30%, and Italy at over 25%.

Monetary and macro-prudential response

In a synchronised effort, the Bank of England has also significantly loosened monetary policy to support demand in the economy, provide access to finance and stabilise the financial system. The Bank has reduced its interest rate by 0.65 percentage points to a record low of 0.1% while expanding its asset purchase programme by £300 billion. Through its Quantitative Easing programme, the Bank will buy up government and corporate bonds, thus helping the government to fund the significant fiscal interventions at very low interest rates. The Bank also introduced a new Term Funding scheme with additional incentives for SMEs to provide banks with four years of cheap funding so that they can continue to lend through the coronavirus crisis period.

The Financial Conduct Authority (FCA) also introduced a package of targeted, temporary measures to help people with some of the most commonly used consumer credit products, reflecting the challenges faced by people from a fall in income and cash flow challenges. For example, the FCA introduced rules asking lenders to freeze loan and credit card payments and charge 0% on arranged overdrafts up to £500 until the end of October. Households struggling to pay their mortgage due to coronavirus will be able to take a payment holiday, or start making reduced payments.