Boris Johnson may live to regret the words he uttered just a fortnight ago. He was asked whether the exorbitant cost of tackling coronavirus would herald a depressing new phase of belt-tightening austerity.
The Prime Minister was adamant, saying: “I’ve never particularly liked the term… and it’ll certainly not be part of our approach.”
However, Treasury mandarins have begged to differ in a hair-raising memo to Rishi Sunak, the Chancellor. What ministers have been reluctant to acknowledge in public makes painful reading in private as the fierce debate between whether to prioritise health or wealth over tackling Covid-19 plays out in the Cabinet.
The Bank of England and the Office for Budget Responsibility, the Government’s fiscal watchdog, have both been optimistic so far in their “V-shaped” scenarios for the economy’s bounceback from the virus crisis.
But there are no such hopes at Horse Guards Parade, just a depressing menu of choices on how to pay for the devastating fiscal damage wrought by the Government’s response to the outbreak while staving off a potential debt crisis.
The Treasury – often a thorn in the side of PMs who are far more eager to spend – has a base case of us reverting to George Osborne’s doctrine of austerity almost as quickly as it was abandoned by Mr Johnson. It envisions spending cuts or tax rises to the tune of £25 billion to £30 billionn a year. That sum is more than one per cent of GDP alone and, if sustained, would compare with the 3.8 per cent lopped off the deficit during the coalition era.
The Treasury’s main scenario assumes permanent damage to the economy and a longer-lasting structural deficit. That will involve brutal choices for the PM, as well as a Chancellor still unbelievably less than three months into the job, if they want to keep debt markets on side.