Rishi Sunak joined forces with the Bank of England to deliver a package of monetary and fiscal measures, including tax and interest rate cuts, to cushion the UK economy as the coronavirus outbreak takes its toll.
The spread of the disease overshadowed a Budget in which the new chancellor ripped up previous Conservative economic policy, replacing austerity with a new willingness to borrow and increase public spending.
The first sign of an unprecedented co-ordinated response between fiscal and monetary policy came before financial markets opened with a 0.5 percentage point cut in interest rates to 0.25 per cent from the BoE — the joint lowest interest rate in the bank’s 325-year history.
Mr Sunak had worked closely with the bank’s outgoing governor Mark Carney and the new governor Andrew Bailey to co-ordinate a big economic response to the virus, as Britain prepared for significant disruption.
The central bank also substantially increased the buffers available to commercial banks for lending, offering them cheap funding tied to loans to small businesses while warning them not to devote any of the new resources towards bonuses or paying dividends.
Mark Carney, outgoing governor of the BoE, said the “timely and powerful” measures were designed to “keep firms in business and people in jobs” as disruption from coronavirus intensified in the period ahead. Andrew Bailey, the incoming governor, said the central bank had spent “roughly half” of its remaining firepower.
The chancellor augmented the BoE’s stimulus with a £12bn package agreed at the last minute and designed to help businesses, households and public services at the sharp end of the coronavirus outbreak.
He pledged to spend whatever it takes to support the NHS, saying he would fund however many “millions or billions” it required to tackle the disease. “Whatever it takes, whatever it costs, we stand behind our NHS,” he said.
As the virus spreads, Mr Sunak pledged that the rules on statutory sick pay would be relaxed significantly for people told to self-isolate for 14 days. Companies would be refunded for their increased costs.
Businesses in the leisure and hospitality sector would benefit from 100 per cent relief from business rates. The smallest companies, which already receive business rate relief, would be eligible for grants worth £3,000 to tide them over.
Financial markets, were unimpressed by the combined firepower of the government and central bank. The FTSE 100 index closed 1.4 per cent lower while US stock markets suffered another day of losses.
Bond investors took the biggest rise in borrowing in 30 years in their stride, with many investors having anticipated an even larger increase. Gilt yields — which govern the cost at which the UK government can borrow — were barely changed by the end of the day with the 10-year gilt trading with a yield of 0.27 per cent.
Alongside the coronavirus package, Mr Sunak performed a U-turn on Conservative budgetary policy, ending the Tories promise to eliminate the deficit and get the underlying burden of debt down, even before coronavirus had any impact on the official forecasts.
With the biggest loosening of fiscal policy since Norman Lamont’s 1992 pre-election Budget, the chancellor’s plans doubled the expected level of borrowing towards the end of this parliament. This earned the chancellor a rare rebuke from the independent Office for Budget Responsibility.
Robert Chote, its chair, said the public finances were now “much more vulnerable” to interest rate rises or inflation increases than in the past.
Mr Sunak’s first Budget was warmly received by most Conservative MPs, but there were also signs that his massive expansion of public borrowing — the biggest in over 30 years — was causing some concern in Tory ranks.
Although Mr Sunak insisted much of the borrowing would fund vital infrastructure and raise Britain’s productivity levels, former chancellor Sajid Javid was among those warning against assuming that interest rates would stay at ultra-low levels for years.
“Interest rates are incredibly volatile and no government should rely on interest rates remaining low for an incredibly long period of time,” said Mr Javid. Privately many Tory MPs shared his nervousness.
Theresa May, former prime minister, said it was vital that Number 10 should not be able to roll over the Treasury in pre-Budget negotiations. “Generally speaking, prime ministers want to spend money and chancellors want to manage the public finances prudently,” she said.
