Government finances and spending

At this joint IFS/CIOT online debate, a panel of David Gauke, Chris Leslie, Stuart Adam and Jane McCormick looked back at the changes in taxation over the 2010s.

The COVID-19 crisis has affected every part of the country – and indeed many other countries. What sets this crisis apart is the many different ways that it is impacting families: while the virus itself is primarily a public health issue, the unprecedented responses it has necessitated mean that this is also very much an economic and a social crisis.

This morning, the ONS published its monthly public finance release for April, giving us an initial snapshot of the public finances under lockdown. It throws the enormous impact of the restrictions on the public finances into sharp relief.

"There aren’t many upsides to the current situation", write Stuart Adam and Helen Miller. "Using it as an opportunity to fix some bits of our tax system could be a silver lining."

The coronavirus outbreak and associated containment measures have caused huge economic fallout across the world. The sharp decline in economic activity that is now occurring will depress government revenues and push up public spending. In addition, governments have, appropriately, responded with packages of fiscal measures that will help support households, businesses and public services through these challenging times and limit the long-run damage done by the crisis. But these measures will also have the direct impact of adding considerably more to government borrowing.

Council tax bands in Wales are based on property values in April 2003 – 17 years ago. That is more up to date than in England and Scotland, where they are based on values in April 1991 (almost 30 years ago!). But it is still enough time for the relative values of different properties to change significantly: for example, official estimates suggest that while average prices had doubled since 2003 across Wales as a whole by the end of 2019, those in Blaenau Gwent had risen 171% compared with just 77% in Wrexham.

The coronavirus pandemic is a public health crisis and global economic shock increasingly affecting lower-income countries around the world – external finance from international institutions and development partners can help plug financing gaps, but may become stretched as many countries around the world seek assistance.

The Debt Management Office announced yesterday that in order to finance the Government’s response to the Covid-19 outbreak it intends to auction £45 billion of gilts this month. This would be a record. It is highly likely that the amount that needs to be raised over the new financial year will be the highest, as a share of national income, since 2009–10 and it could even exceed that peak. With an increasing amount of gilts set to be bought by the Bank of England the public finances will in future be even more exposed to changes in short-term interest rates.

The coronavirus pandemic is first and foremost a public health crisis. But it also represents a large and systemic economic shock, with massive effects on both the supply and demand sides of the economy.

Isabel Stockton, a research economist at the Institute for Fiscal Studies, said: “The response to the covid-19 pandemic has led to a sharp downturn in economic activity. It has also, rightly, prompted a substantial fiscal policy response, the cost of which will add directly to government borrowing.

Chancellor Rishi Sunak has announced more financial measures to address the impact of coronavirus on the economy.