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Coronavirus wage support could cost UK £40bn, says Goldman Sachs

·Senior City Correspondent, Yahoo Finance UK
·2-min read
Britain's Chancellor Rishi Sunak gives a press conference about the ongoing situation with the COVID-19 coronavirus outbreak inside 10 Downing Street in London, Tuesday, March 17, 2020. For most people, the new coronavirus causes only mild or moderate symptoms, such as fever and cough. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia. (AP Photo/Matt Dunham, Pool)
Britain's chancellor Rishi Sunak. (Matt Dunham/Pool via AP)

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.

Read more: Government to pay workers's wages as pubs, restaurants, and gyms told to close

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.

Read more: JD Wetherspoon boss tells staff to consider work at Tesco

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.

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