UK Edition
The Bank of England was forced to save the Government from potential financial collapse as markets seized up at the height of the coronavirus crisis, Governor Andrew Bailey has said.
In his most explicit comments yet on the country's precarious position in mid-March, Mr Bailey said "serious disorder" broke out after panicking investors sold UK government bonds in a desperate hunt for cash.
It left Britain at risk of failing to auction off the gilts needed to fund crucial spending - and Threadneedle Street had to pump £200bn into the markets to restore a semblance of order.
In comments to Sky News, Mr Bailey said that without the emergency move "the prospects would have been very bad. It would have been very serious”.
He added: "I think we would have a situation where in the worst element, the Government would have struggled to fund itself in the short run."
The intervention to prop up the gilt market was expanded last week by the Bank's Monetary Policy Committee with a further £100bn although Mr Bailey warned explicitly on Monday that this support for financial markets will not last forever.
Any wind-down will pile further pressure on the Treasury’s funding costs as Chancellor Rishi Sunak faces a deficit of at least £300bn this year.
Mr Sunak is said to be considering a VAT cut followed by tax rises over the longer term, but economists have warned the former could fail to have any real positive effect while the latter would be a disaster that chokes off recovery.
Former Chancellor Lord Darling proposed a VAT cut to boost consumption following his own similar move in the wake of the 2008 crash.
But Julian Jessop, a fellow at the Institute of Economic Affairs, said: “It’s hard to imagine a worse combination than a temporary VAT cut to stimulate spending that is likely to happen anyway, offset by the threat of future tax rises that would cast a long shadow over the economic recovery.
“The demand problem isn’t a lack of willingness to spend, it’s the ability to spend. It makes far more sense just to open the shops, pubs and restaurants and cut employer insurance contributions. People would be far more likely to spend if they knew their jobs were safe.”
Richard Hyman, an independent retail analyst, warned that online retailers such as Amazon – rather than bricks-and-mortar shops – would be the main beneficiaries of cutting VAT.
He said: “Retail needs whatever help it can get but a VAT cut won’t necessarily make a massive difference in the short term to most physical retailers.”
The Federation of Small Businesses backed Lord Darling's call for a temporary VAT cut, but added that Mr Sunak should cut employers' national insurance contributions (NICs) to encourage job creation.
The Institute of Directors also suggested raising the threshold for employers’ NICs after its latest confidence tracker showed that hiring and investment intentions among members for the year ahead had hit new record lows.
Jonathan Geldart, director-general of the IoD, said: "The Government may want to hold back some ammunition until the autumn, but directors have to make hiring and investment plans ahead of time. Now is the moment for the Treasury to reduce the cost of employment so companies can retain staff.”
It came as a new survey revealed households are deeply pessimistic over job security amid fears of a second wave of redundancies when the furlough scheme ends.
IHS Markit’s household finance index climbed to just 36.7 in June, up marginally from April’s record low of 32 but still at levels never seen before the Covid crisis. A score below 50 signals a deterioration in sentiment.
Joe Hayes, economist at IHS Markit, warned the pessimism on jobs will mean families hold back on spending, making recovery more difficult.
He said: "If households are fearful for their job security and their incomes are falling, the UK's path of recovery could be a slow one."
Meanwhile factory production sank to a new record low in the three months to June, according to the Confederation of British Industry’s industrial trends survey.