Britain's Chancellor of the Exchequer Rishi Sunak holds the budget box outside his office in Downing Street in London, Britain, March 11 2020. REUTERS/PETER NICHOLLS
Britain's Chancellor of the Exchequer Rishi Sunak holds the budget box outside his office in Downing Street in London, Britain, March 11 2020. REUTERS/PETER NICHOLLS

London — UK finance minister Rishi Sunak has pledged a £30bn stimulus package as he seeks to prepare the British economy to fight the potentially devastating effect of coronavirus.

After the Bank of England (BOE) made an emergency interest-rate cut on Wednesday morning, Sunak began the government’s co-ordinated response, as policymakers seek to tackle the greatest threat to the world economy for more than a decade.

In his budget statement to parliament, Sunak promised the huge fiscal stimulus “to support British people, British jobs and British businesses through this moment”. It will be accompanied by the biggest jump in borrowing since 2013.

“I know how worried people are,” Sunak told the UK House of Commons. “We are doing everything we can to keep this country, and our people, healthy and financially secure.”

Sunak warned that the virus will inevitably lead to a reduction in consumer spending, but said he is in “constant communication” with the BOE over the “co-ordinated” and “comprehensive” response to the virus. He set out his multi-billion-pound, three-point plan, including £7bn to support businesses and individuals:

  • The National Health Service (NHS) will get “whatever it needs, whatever it costs”, with a £5bn emergency response fund immediately for public services.
  • People will get financial support if they need it to cope with the coronavirus, with statutory sick pay for everyone who’s been told to self-isolate, and more generous welfare rules.
  • Supporting businesses: government is to refund sick pay bills for 14 days in full, for 2-million companies with fewer than 250 employees.

The pound swung between gains and losses, before trading up 0.3% against the dollar at $1.2952. UK government bonds were little changed, suggesting investors aren’t that concerned about any inflationary impact of the plans.

Britain’s Debt Management Office said it plans to issue £156bn of gilts in the 2020/2021 fiscal year. That’s the most since 2013, but still less than forecast. Borrowing costs are at record lows.

The co-ordinated response from the UK central bank and government underlines the scale of the threat to the global economy from the outbreak. The Italian government pledged $28.3bn to combat the epidemic, while the European Central Bank (ECB) warned of a 2008-style crisis and German Chancellor Angela Merkel pledged to do “whatever is necessary” to weather the economic storm.

For Sunak it is a baptism by fire. He has been in the most senior finance minister’s post for only 27 days, after his predecessor quit following a disastrous clash with UK Prime Minister Boris Johnson. His statement comes at a critical time for the British economy, which unexpectedly stalled in January, even before any impact of the virus could be felt.

The estimate for 2020 expansion was lowered to 1.1% — which would be the worst since the financial crisis — and 2021’s to 1.8%

Businesses fear the impact of the virus could be catastrophic, with as many as one in five workers potentially being forced to stay at home sick, according to officials.

Wednesday’s budget was meant to be the moment Johnson’s government unveiled its great vision. After winning a large majority in last December’s election, his Conservative administration has set out to re-order the UK economy, reviving regions of the country that have been “left behind” by faster growth in London and the south.

Instead, the details of Johnson’s most ambitious plans have been postponed as the emergency response to the virus crisis dominates the government’s focus.

In a sign of the scale of the challenge ahead, Sunak announced downgrades to official growth forecasts — which do not take into account the full extent of the virus’s impact. The estimate for 2020 expansion was lowered to 1.1% — which would be the worst since the financial crisis — and 2021’s to 1.8%.

Sunak insisted his plans will meet his fiscal rules, with room to spare, despite concerns over how he will pay for his pledges. Crucially, the UK Office for Budget Responsibility, an independent body that produces fiscal forecasts for the chancellor, has not had a chance to assess his huge stimulus package, or the effect of the virus on the economy.

Sunak insisted his statement delivers on the key promises the Tories made to austerity-weary voters last year. He’s unveiling a record £600bn spending programme on infrastructure across the country, targeted on roads, railways, housing, digital connectivity and research and development.

In other measures announced in Sunak’s budget:

  • The threshold for paying National Insurance will be increased from £8,632 to £9,500, “a tax cut for 31-million people”, typically worth £104 per person.
  • Public spending will be £100bn higher over the next five years.
  • £800m used to establish two or more new carbon capture and storage clusters, creating 6,000 jobs.
  • Entrepreneurs’ tax relief will be reduced but not be fully abolished, despite speculation it would be axed.
  • Research and development investment will be raised to £22bn a year.
  • Fuel duty will be frozen for another year and a planned rise in beer duty will be canceled.
  • More investment in transport infrastructure across the UK, and extra spending on broadband.

With Dana El Baltaji, Zoe Schneeweiss, Lucy Meakin, David Goodman, Andrew Atkinson, Stuart Biggs, Olivia Konotey-Ahulu and Eddie Spence

Bloomberg