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The government needs to adopt a “wartime mentality” and not be “squeamish” about borrowing money to save people and businesses from the economic impact of coronavirus, the spending watchdog has said.
Robert Chote, the chair of the Office for Budget Responsibility (OBR), said running up high levels of public sector debt would be “money well spent” to help the UK through the economic crisis caused by the outbreak.
He spoke as chancellor Rishi Sunak prepared on Tuesday to unveil a new financial package to help those parts of the economy worst hit by coronavirus and the effective lockdown ordered by the government.
Chote said during the Second World War the UK ran massive budget deficits above 20% of GDP, around £440bn – way in excess of the £12bn package of support Sunak announced in last week’s Budget.
He said more borrowing would be “no abdication of budget responsibility” during the coronavirus crisis.
“I think clearly now the situation has moved on even in the few days since that Budget announcement,” Chote told the Commons Treasury committee.
“The chancellor was clear for example on the NHS and, in a sense, over the broader public services that you spend what you need to at this point.
“And so one regards the £12bn as being a down payment.
“I think that we’re going to be going through this for some time and the idea of what needs to be done and how expensive it is going to be is going to change on an almost daily basis.
“But this is no abdication of budget responsibility to be spending what you need to spend to deal with this.
“In some ways it’s like a wartime situation – we ran during the Second World War budget deficits in excess of 20% of GDP five years on the trot and that was the right thing to do at that time.”
He went on: “This is not a time to be squeamish about additions to public sector debt. It’s more like a wartime situation in that this is money well spent.”
Chote added: “The more serious this is, the more blunderbuss you have to be in the approach.”
“When the fire is large enough, you just spray the water on it and worry about it later.”
OBR budget responsibility committee member Sir Charles Bean said the government would need to spend the equivalent of the annual hit to GDP – for example that a 5% decline would require 5% of GDP-worth of borrowing.
But he said any increase in borrowing would be temporary as coronavirus is not exposing underlying issues in the economy, unlike the 2008 financial crisis.
“Think about what happened during the financial crisis, we were around about 40% of GDP when we started, we came out of it not so far from 80% of GDP,” Bean said.
“And that’s essentially because of not only the depth but the persistence of the downturn.
“Now this ought to be different from the financial crisis because the key thing about the financial crisis is there were underlying structural problems which we weren’t aware of going into the financial crisis, but they were exposed.
“This time around there isn’t a fundamental structural problem in the economy that needs correcting, at least for the most part, it’s just this exogenous shock that’s hit us in the health sphere.
“So I think it is reasonable to think that any increase in boring, that you do now really would be temporary.”
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Bean also called on insurers to pay out to businesses like bars, pubs, restaurants and cafes that will be badly hit by the lockdown, and for the government to step in as an “insurer of last resort” if necessary.
“I don’t have any disagreement that insurers should step up to their obligations,” he said.
“But there is a question about whether just relying purely on privately provided insurance because some businesses and some people will have it some won’t.
“There may be a question in some cases whether the insurers even have enough pockets to be able to pay out.
“This is why in some sense you need the state to be there as the insurer of last resort and against what is essentially an act of God.”