Where does bailout money come from and who will pay for it?

The British government has announced a financial stimulus package unprecedented in peace time as it bids to offset the economic impact of the coronavirus.

On top of its £350 billion bailout package, equating to roughly 15% of GDP, the Treasury has also promised grants to cover 80% of the salary of retained workers up to a total of £2,500 a month, a freeze on business VAT, cash handouts for small businesses, extra welfare payments and yesterday support for five million self-employed workers.

But while “almost everybody agrees that the government can't afford not to make huge interventions to keep businesses, households, workers and the economy afloat” writes BBC economic editor Faisal Ahmed, “the costs are now racking up”.

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So where does this money come from?

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“It’s important to distinguish between government spending and state loan guarantees” says The Independent’s economics editor, Ben Chu.

The Chancellor’s £330bn of loan guarantees are a contingent liability for the UK state, meaning that “if the loans made by banks to suffering private companies are not repaid the state will have to compensate the commercial lenders”.

“In ordinary times, a recession means less tax and more spending, sending deficits higher as a result of the so-called ‘fiscal stabilisers’”, says Ahmed. “But this is no ordinary downturn” and so “massive borrowing is needed to spend tens - and perhaps hundreds - of billions more at a time when the tax base is eroding”.

Last week, the Bank of England cut its target rate to a record low 0.1% and boosted its bond-buying program by $230 billion, “having previously rolled out a cheap credit program, and gave banks more scope to lend”, reports Quartz.

Chancellor Rishi Sunak said the figures are “on a scale unimaginable only a few weeks ago”, but the impact of not propping up the economy would be far more costly to the UK in the long term.

“Eonomists identify the gravest threat in the current environment not as falling economic activity – that is a necessary by-product of dealing with the health emergency – but as the long-term damage to our productive capacity,” Chu says.

“If the Government undercooks its stimulus or bailout packages today, during the crisis, more businesses than otherwise will go bust and unemployment will rise further and this will scar the economy long into the future”.

The greater questions is not, therefore, whether we can afford the vast sums of money being pumped into the economy, but who will pay for it.

“We may be in the midst of an unprecendented global crisis but the Right have lost no time in trying to capitalise on the crisis to create the low-tax, small state nation they want to see,” reports Left Foot Forward.

The left-wing news site says the Taxpayers’ Alliance group, a right-leaning think tank, has already written to members arguing said that the debts the government is running up in the crisis should be paid off by “spending restraint” rather than taxes.

“Restraint here is a euphemism for cuts” the left-leaning news site says and “when the immediate danger of coronavirus passes, this is likely to be the debate which defines much of the 2020s”.

In a statement, the Taxpayers’ Alliance said: “For once, calls for higher spending, borrowing and debt are justified.” Once the crisis has passed, it added, “debt levels will need to be brought back down rapidly through growth-enhancing measures and spending restraint”.