Yahoo Finance Coronavirus wage support could cost UK £40bn, says Goldman Sachs
The government’s new coronavirus job retention scheme could cost in the region of £40bn ($47.5bn), according to economists.
Last week, chancellor Rishi Sunak announced “unprecedented” subsidises to worker wages in a bid to stop unemployment spiking and the economy crashing during the coronavirus crisis.
Under the new scheme, the government will pay up to 80% of UK workers’ salaries, to a maximum of £2,500 per month, for three months if workers are furloughed.
“Based on our calculations, such a scheme could contribute to £40bn in additional government borrowing this financial year (almost 2% of GDP),” Goldman Sachs economist Adrian Paul wrote in a note sent to clients last week.
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Paul’s calculations assume that all workers in the “acutely affected” manufacturing, hospitality, real estate, and entertainment industries use the scheme for a full three months. Collectively, staff in those industries represent 19% of the British workforce.
Paul said the estimate was a “thought experiment [that] offers a sense of magnitude.”
Analysts at Bank of America offered a similar ballpark estimate, saying this week the scheme could cost the government £45bn over three months.
The coronavirus job retention scheme is one of a number of new measures announced by the government in recent weeks to support the NHS and the economy through the Covid-19 pandemic. The government has announced around £70bn of new spending, as well as a £330bn loan guarantee scheme to support businesses.
Economists expect more spending pledges and tax breaks in the coming days.
“We expect the chancellor to extend wage replacement to self-employed, improve sick pay, cancel some tax payments, coordinate household bill holidays, and work on specific industry help,” Bank of America’s Global Rates and Currencies team wrote in a note to clients on Tuesday.
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The UK’s budget deficit is forecast to balloon this year in part due to these new spending measures. Bank of America said the deficit could reach 7.5% this year, while JP Morgan said a budget shortfall of 10% was “plausible.” That would take the UK back to levels not seen since the financial crisis and compares with a deficit of 1.9% in 2019.
However, rising deficits are forecast not just due to additional spending, but also due to a shrinking economy, which would lead to lower tax receipts. Over the last week, a range of Wall Street economists have said the UK economy could shrink by between 2% and 7.5% this year.
Data released on Tuesday pointed to a sharp recent slowdown in the economy that was worse even than during the depths of the 2008 financial crisis.
