Fiscal Insight: Coronavirus and the public finances
Huge economic shock combined with unprecedented fiscal interventions are driving a global and UK fiscal crisis. ICAEW analyses the effect of coronavirus on public finances around the world and on the UK’s public finances in particular.
The global economy is experiencing a major recession with severe consequences for public finances around the world.
Whole sectors of the economy have been closed down, while governments have borrowed heavily to finance large-scale fiscal interventions in order to mitigate the damage.
A global recession, damaging public finances around the world
- Severe impact on trade, prosperity and tax receipts across the entire planet
- Large-scale fiscal interventions by governments seeking to preserve businesses and jobs
- A massive expansion in public debt to burden future generations
A dramatic transformation in the UK’s fiscal position
- Public spending expected to exceed £1tn for the first time
- Fiscal deficit approaching £300bn, with net debt rising from £1.8tn to in excess of £2.2tn
Rebuilding the public finances will be challenging
- Sustainable public investment will be key to driving the economic recovery
- A long-term fiscal strategy is essential to repairing public finances
“In only a couple of months our lives have been turned upside down by the coronavirus pandemic, both from the risks to health and from the impact on the economy. Whole industries have been closed down by government order, while restrictions on individual movements have adversely affected many other aspects of economic activity. A severe recession is underway.
"The consequences for public finances around the world and in the UK are extraordinary.
"Interventions to support individuals and businesses financially through this difficult time are extremely welcome, but they are increasing public spending substantially just as tax revenues collapse. In many countries – including the UK – public finances are already burdened by high levels of debt, rising costs for health, social care and pensions, while public services are under pressure following a decade of austerity since the financial crisis.
"As the insurer of last resort, governments have a major part to play both in minimising the economic damage during this emergency, as well as in rebuilding the economy after the lockdown ends. It will be more important than ever for governments to develop long-term fiscal strategies to put their public finances onto a sustainable path.”
Alison Ring, Director, Public Sector, ICAEW