Can the UK Government really offer financial support during COVID-19 Coronavirus outbreak? wearecrank Follow Mar 21 · 6 min read

Introduction

This is not meant to be a cold capitalist view in these trying times. It is meant to be a simple review of the UK economy and how sustainable the support is for UK citizens and the economy. It is not about doom and gloom, but I wanted to create awareness of the debt we are taking on in the UK and how sustainable that is.

Would love to hear your thoughts and welcome comments below.

Before we start: Although the finances mean nothing compared the cost of human life, they cannot be ignored.

Other COVID-19 Coronavirus analysis I have liked

For analysis on COVID-19 Coronavirus there have been a couple of really interesting pieces by Kevin Systrom to forecast the number of cases, this by Tomas Pueyo on what the Next 18 Months Can Look Like, if Leaders Buy Us Time and this from Gideon Litchfield on social distancing and it becoming our way of life, in some ways forever.

Tl;dr — so with the recently announced government support to businesses and employees, how much of an impact will this have on our economy and should we be concerned?

The UK has been in far greater financial difficulty, and in the past not only has this been a lot bigger, we historically have recovered quicker. However, with all that said and done, we need to ensure we all stay safe and hope this health crisis passes both for our sanity and the health of the economy.

What is the UK Government doing to support businesses and employees?

We have all seen the recent news from the UK government to support both businesses and workers.

The most recent highlight is Rishi Sunak announced a government scheme offering up to £2,500 per month to support those not working in the Coronavirus crisis. This is in addition to the £350 billion in support for businesses.

How much is the UK government promising?

I have tried to create a chronology of what has been announced (Let me know if I have missed anything)

March 11th — The budget is announced with the UK Chancellor offering £30 billion in support for the Corona outbreak.

March 17th — Support (in the form of loan and grant packages) is announced for UK businesses in the sum of £350 billion, which aims to avert a major economic recession.

March 20th — Support for workers is announced which is calculated to cost an additional £78 billion. There will also be deferred VAT payments until the end of June, which is forecast to cost £30 billion, although this needs to be paid back by the end of the financial year.

So to add it up (excluding the VAT deferred payment):

The total is £458 billion in support for the UK economy

So can the UK government actually deliver on this promise and how long could this impact the UK economy?

Is this the biggest bailout ever?

Certainly not. There have been 3 other huge events since 1694 when the Bank of England was created.

The chart below shows the three major events.

Using debt as a percentage of GDP, which is used to measure the amount of debt a country has and if it has too much debt, the UK percentage peaked due to the Napoleonic wars, which ended in June 22, 1815.

The effect of the war was felt financially when it peaked in 1821 at 260% of GDP.

How does that compare to the UK today?

The Office for National Statistics (ONS)records the UK debt as a percentage of GDP at 85.2%. This slightly lower than that recorded by Eurostat at 85.9% from 2018, illustrating a slight year on year decrease (see chart below).

Eurostat records the UK debt to GDP percentage at 85.9%

How does that compare to other countries today?

The UK is 29th globally based on the national debt to GDP percentage, with Japan top with a national debt to GDP of 237%.

How does this compare to the financial bailout of 2008?

Looking at the financial crisis of 2008 we saw the UK debt to GDP percentage jump from 41% to over 74% in 2010. The UK Government bailed out the banks with a peak of £955 billion, which came down to £512 billion by 2010.

Before the financial crisis:

The impact after the financial crisis:

This continued to rise to 86.9% in 2015 and started to decline in 2016 onwards, down to the UK ONS 2019 figure of 85.2%

Historically how long has it taken to recover?

This is a hard question to answer. There is obviously so much that can effect the debt to GDP percentage, however there is one thing which has historically happened. The percentage after a peak has decreased over time, even with the most recent 2008 financial crisis.

If we look at the 4 big events the UK has been through we can see how long it took:

First the Napoleonic war (43 years):

World War I (17 years, but World War II starts):

World War II (18 years)

2008 Financial Crisis (8 years):

What could that mean for the UK with the impact of COVID-19 Coronavirus long term?

If you take the figure of £458 billion from above, then the total expenditure (not accounting for another other increases) would take the UK total to £2.279 trillion up from the most recent released data of £1.821 trillion.

That would mean the UK debt to GDP percentage could be anywhere between 103% and 107%.

Why the range?

Geek fact: The reason for the range is the source of national annual GDP. This stands at £2.21 trillion (see chart below), but when using that number against the current UK debt of £1.82 trillion, the percentage comes out at 82.2% so short of the 85.2%. If you use the 85.2% number then this make the UK total GDP £2.14 trillion.

In conclusion:

Given the current state of affairs, everyone is suffering, obviously some more than others.

Although the finances mean nothing compared the cost of human life, they cannot be ignored.

SO: Can the UK Government really offer financial support during COVID-19 Coronavirus outbreak? The short answer is YES, at the moment given the level of financial support offered.

The UK has been in worse financial situations. The 2008 financial crisis, at its peak, cost the UK government £503 billion or 111% more than what has currently been promised. However, we have only just recently started to reduce the impact of the 2008 financial crisis.

To state the obvious, the key question on everyone’s minds (from a sanity and economic view) is how much longer will we need to isolate and when can we get back to normal. Going back to “normal” may not be until this time next year, as we don’t know about second waves or repeating of social distancing if we didn’t get it right first time.

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