The UK government will run a budget deficit in excess of £200 billion this year. The cost of all the schemes and programmes the UK is running in order to subsidise business , employees, and the self employed is quickly adding up. Making matters worse, the tax take by the government this year is set to fall sharply. Whichever way you look at it, the deficit figure expected this year is huge and equates close to 10% of gdp.
I’ve heard many people ask recently, “How are we going to pay for that?”
With debt, of course. Enormous, hard-to-fathom, piles of debt.
In the UK, debt is predicted to rise from 85.4 per cent of GDP last year to 95.7 per cent this year.
So the real question is, how will we pay for all this extra debt? How will we pay for all the free money government is doling out.
One method that is being touted in the press is monetisation. However, there is a way out: monetisation. This is where the central bank, in this case the Bank of England, buys all the extra debt created by the government. The BOE will simply create new money (by electronic means rather than physically printing banknotes) and use it to buy government bonds.
The problem is that if we go down this monetisation route, our currency, pound sterling, would crash thus bringing about inflation as the price of imports would rocket upwards. Interest rates would also have to rise in order to stabilise inflation and the currency but this brings about its own problems such as mass mortgage defaults, bankruptcy and unemployment.
So monetisation is one method the government could use. But the sums in this case are just too huge in my opinion for the entire amount to be monetised without any of the ill effects being felt.
The only logical conclusion as to how we pay for all this is that taxes are going to have to rise.
The chancellor, Rich Sunak, has already hinted at this during his speech announcing the bail-outs in late March. This line was particularly striking, “If you all want to benefit equally from state support you must all pay in equally in the future.”
There has been no indication as yet as to which taxes will rise. But make no mistake, tax hikes are coming. I don’t think the chancellor will announce any changes in tax till the corona crises is over. My guess is that sometime in the next few years we’ll have the biggest tax increase since the end of World War 2.
I feel sorry for young people who are about to enter the workforce. They will have seen no benefit from the employee furlough scheme nor the self employment scheme but it will be them that will have to bear the brunt of the debt burden and pay it off in years to come.
As for the rest of us, what does this mean from a personal finance perspective? Its time to buckle up our belts. Now is the time to prepare. Now is the time to get our houses in order. We will certainly have less money flowing into our bank accounts then we did previously. So take a knife to that budget and cut any excess fat. For leaner days are coming and we should all be well prepared.