Alongside the enormous medical and social toll that Covid-19 has had on all of us, the pandemic has also had a very real and tangible economic cost.
Many businesses were unable to continue operating as staff and customers were stuck at home during lockdown, plunging the UK economy into a recession in 2020. This forced the government’s hand in finding ways to support individuals and businesses, all the while spending money on public services to battle the virus.
The eye-watering figures for these costs came into focus during the chancellor’s spring Budget on 3 March, as Mr Sunak announced that government Covid-19 borrowing had reached more than £350 billion, raising public net borrowing up from just £55 billion in 2020 to £394 billion in 2021.
Spending can be divided across three key areas: public service spending, support for households, and support for businesses.
So, where exactly has the chancellor been spending this borrowing? And who is going to pay for it?
Source: Institute for Government
Spending on public services fighting Covid-19: £127 billion
According to the Office for Budget Responsibility, the government has spent £127 billion on bolstering public services to help the fight against Covid-19.
This includes extra money spent on health services and procuring extra personal protective equipment (PPE). It also consists of £22 billion on the Test and Trace system, with a further £15 billion pledged to spend on it.
Of the £127 billion, the Treasury has held £25.3 billion in reserve, with the expectation of having to further support public services at a later date.
Cost of supporting individuals through the Coronavirus Job Retention Scheme: £54 billion
Mr Sunak was particularly proactive in supporting those who would be unable to work due to lockdown. He achieved this via the Coronavirus Job Retention Scheme, more commonly called the “furlough” scheme, which has cost £54 billion so far.
Since March 2020, the government has paid up to 80% of wages for those who were unable to work. Primarily, this consisted of individuals working in accommodation and food services, arts and entertainment, and wholesale and retail.
At its peak during the first lockdown, the furlough scheme supported nine million workers. But, as the economy has reopened and people have returned to work, provisional data from 28 February – the last time data was available – showed there were just 4.7 million furloughed workers.
Cost of supporting businesses with Bounce Back loans, and other business help: £87 billion
As well as supporting individuals, the government has spent £87 billion supporting businesses to keep them afloat if they were unable to operate during lockdown.
This £87 billion was spent across three areas:
- Loans and guarantees, £31 billion: This includes the Bounce Back and Coronavirus Business Interruption Loan Schemes.
- Business rates relief, £10 billion: This has reduced tax for businesses.
- Business grants, £13 billion: These grants to businesses do not have to be repaid.
Of the £87 billion total, the government is entirely responsible for a total of £31 billion.
Cost of supporting the self-employed: £20 billion
The government also offered the Self-Employed Income Support Scheme (SEISS), giving £20 billion worth of funding to support the self-employed. The furlough and business schemes could see self-employed workers fall through the cracks, so the SEISS has bridged this gap.
Under the SEISS, self-employed workers could receive up to 80% of their profits averaged over the previous three years of income, up to £2,500 a month.
Lost tax revenue: around £76 billion
Aside from the additional government spending necessary to support the economy, the Treasury has also lost out on tax receipts in the past year.
In 2019/20, tax receipts totalled £635 billion. However, the Institute for Government forecast that tax revenues shrank 12% in the past 12 months, representing a squeeze of £76 billion. The Office for Budget Responsibility expects this to be the biggest annual contraction in more than 300 years.
Government income will gradually recover as businesses recover and more people return to work. However, this growth will still be hampered by further attempts to rejuvenate the economy.
For example, the chancellor has cut the VAT rate for the hospitality and tourism sector for the next six months, reducing government income by around £5 billion.
The Budget also contained measures for reducing government debt
Naturally, levels of such high borrowing and public spending will have to be paid for somehow. As a result, Mr Sunak announced a range of measures in his Budget that will seek to strengthen the public purse.
From the freezing of key exemptions and thresholds, such as the pension Lifetime Allowance, to a 6% increase in Corporation Tax, the chancellor has set out a five-year roadmap for financial recovery.
Mr Sunak did confirm that he is increasing the amount of income tax gathered by freezing the income tax threshold. This is the amount you can earn each year before paying any income tax – £12,500 at the moment.
Normally it goes up a little each year, to reflect the fact that many people’s wages rise a little too.
This threshold will rise next year to £12,570, but will stay at that level until 2026, as will the threshold at which you start to pay the higher rate of 40%, fixed at £50,270 until 2026. These measures should raise about £8bn a year within five years.
As these policies disproportionately target the wealthy, many analysts have described them as stealth taxes and pension raids under another name.
This means that if people do get a wage rise, they will be paying more income tax.
Mr Sunak is prevented from changing income tax or national insurance rates in line with the Conservative manifesto, so all eyes are on next year’s Budget. This will be the opportunity when the Chancellor can really start to address how the cost of Covid can be paid for and how the expected economic recovery will help bring down government debt over the remainder of this Governments tenure. He is likely to turn his focus to other areas of taxation such as capital gains and pension tax relief.
For more information on key changes to tax allowances, exemptions, and thresholds, please visit