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Coronavirus: How much will it cost the UK and how will we pay?

By Ben King
Business reporter, BBC News

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  • Coronavirus pandemic
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With much of the UK under lockdown, many shops, pubs and restaurants are shut, and large parts of the economy are effectively closed.

The government has spent hundreds of billions on measures to support businesses and jobs, and fight the pandemic. But how will it pay for these?

How much will coronavirus cost the UK?

We won't know how big the final bill will be until after the crisis is over. But the government will certainly have to borrow enormous amounts of money because it is spending more than it is taking in from tax.

On 25 November, the Office for Budget Responsibility (OBR), which keeps tabs on government spending, estimated that borrowing would be £394bn for the current financial year (April 2020 to April 2021).

That's the highest figure ever seen outside wartime.

To put that into context: before the crisis, the government was expecting to borrow about £55bn for the whole financial year.

Why does the pandemic mean the government has to borrow more?

This year the government is spending a staggering £280bn on measures to fight Covid-19 and its impact on the economy.

That includes £73bn for measures to support jobs such as the furlough scheme, where the government pays most of the wages of employees who cannot work.

The NHS and other public services have been given £127bn extra to combat the pandemic, and £66bn will be spent on grants and loans to support businesses.

The government will also raise £100bn less tax than it hoped because of the crisis. Unemployed or furloughed workers pay less income tax, businesses pay less tax if their profits are lower, and shoppers pay less VAT if they buy fewer things.

image copyrightGetty Images
image captionFighting Covid-19 is costing hundreds of billions of pounds this year alone

With more money going out and less coming in the government has only one option - to borrow.

Even if the pandemic ends quickly, there will still be higher costs and lower tax receipts in future years too, all of which means more borrowing.

Will I have to pay more tax?

Some economists argue that all the costs of the crisis could be covered by borrowing alone, but many disagree.

If the government wants to get borrowing down, it will have to cut spending or raise taxes, or most likely, both.

Raising taxes would be politically awkward, because the Conservative 2019 manifesto promised not to raise the three biggest taxes. These are income tax, national insurance and VAT - and together they bring in more than half of government revenue.

image copyrightDan Kitwood
image captionThe 2019 Conservative manifesto promised to protect pensions and not raise income tax, national insurance or VAT

Increasing taxes means people have less money to spend, which could slow the economy down further. However, the respected Institute for Fiscal Studies think-tank has warned that tax rises of more than £40bn a year are "all but inevitable".

Cutting spending will also be difficult. There have been big cuts over the past decade, and many of the easy savings have already been made.

Some areas have long been protected, such as the NHS - and it would be difficult to reduce health spending after a big pandemic.

State pensions, another big spending item, are protected by a so-called "triple lock", which guarantees they rise with wages, prices, or 2.5% every year, whichever is highest. The manifesto promised to keep this, too.

In Wednesday's Spending Review the chancellor, Rishi Sunak, did make some cuts such as freezing pay for many public sector workers.

He also cut the amount the UK will spend on overseas aid, despite a manifesto pledge to keep it at 0.7% of national income.

The chancellor could say the pandemic also makes other manifesto promises impossible to keep. But difficult choices will have to be made.

So how will this affect my life?

If taxes go up, people will soon realise they have less money to spend.

Likewise, people will notice if lower public spending results in worse public services, such as longer waiting times in hospitals or fewer police on the streets.

Public sector workers whose wages are frozen will feel that impact very keenly.

And if pensions or benefits are cut, or even just increased less rapidly, that will be felt directly by anyone who depends on them.

How will the money be raised?

At first the government will raise money by borrowing from investors.

They could be individuals, companies, pension funds, or foreign governments who lend money to the UK government by buying bonds.

A bond is a promise to pay the money back in the future, and pay interest on the loan in the meantime.

The Bank of England is buying huge amounts of bonds, to support the economy by encouraging more spending and investment, in a process called "quantitative easing".

This year the Bank is buying £450bn worth of bonds, which makes it much easier for the government to borrow money.

Can the UK afford all this debt?

In recent years, the government has been able to borrow easily at very low interest rates, which makes its debt more affordable.

At the moment it pays just 0.32% interest to borrow for ten years.

There is a limit to how much the government can borrow, before interest payments become so great it can't afford them. No-one knows quite where that limit is.

But those interest payments will still weigh on future generations until the debt is paid off, and will mean there is less money available to spend on public services, or tax cuts.

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