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UK Faces "Potentially Catastrophic" Financial Hit As COVID Legacy Costs Mount

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by Tyler Durden
Wednesday, Jul 07, 2021 - 04:15 AM

Overnight, the UK's Office for Budget Responsibility, an independent financial watchdog housed within the UK Treasury, released its annual report on fiscal sustainability pointing to several risks to the UK's public finances, which have deteriorated since the start of the pandemic.

Perusing a summary of the report's contents, two bits caught our attention: assessing the long-term impact of the pandemic on the government's finances, the report warned that the pandemic could leave the British government facing a "potentially catastrophic" financial hit equivalent to around 10 billion pounds of unfunded "legacy costs" tied to the pandemic per year over the next three years.

The report highlighted three categories of risks: health, education and transport.

  • Health: Pressures on health budgets could be around £7 billion a year from the potential need to pay for: standing test and trace and revaccination programmes; the consequences of the pandemic for individuals’ physical and mental health; additional spare capacity to cope with possible future outbreaks; and the pandemic-related backlog of treatments.
  • Education: Schools may require around £1¼ billion a year to enable pupils to catch up on the estimated two to three months of education that they have lost on average during the pandemic, in addition to the £1.4 billion that has been committed since the Budget, with the intention of reviewing the case for further funding in the Spending Review.
  • Transport: Around £2 billion a year may be needed to fill a 10 to 25 per cent hole in the fare revenues of the new Great British Railways and Transport for London (TfL) if passenger numbers do not return to pre-pandemic levels. The Government has already provided £12.8 billion of direct support to the railways and TfL in 2020-21. However, as of June 2021, passenger numbers on national rail and the London Underground were still down a half on pre-pandemic levels.

Here's a representation of these expectations showing how the NHS, the UK's public health-care.

Beyond these medium-term pressures, the report's authors also identified additional longer-term risks expected to be caused by economic "scarring" caused by lower investment, lower labour supply, and lower total factor productivity.

But unanticipated pandemic-related costs weren't the only red flag raised in the report. Another issue that caught our eye was the watchdog's estimate that the UK's transition to "net zero" carbon emissions could add debts equivalent to 21% of annual GDP over three decades. While the UK's "transition" to a low-carbon economy is off to a good start, getting the rest of the way to net zero by 2050 will require Britons to find ways of overcoming both the technological obstacles to delivering cost-effective carbon removals at scale, as well as the challenges associated with upgrading insulation and installing low-carbon heating systems in more than 28 million homes. All told, the cost to Briton's public finances could amount to roughly half a trillion dollars.

Fortunately for the UK and its public finances, PM Boris Johnson is planning to lift the last remnants of the country's COVID restrictions on July 19. But as the Delta "scariant" continues to spread, eliciting more shouts of alarm from public health officials (while more mutated COVID variants appear to be waiting in the wings) we wouldn't be surprised to see the government's long-term fiscal position deteriorate further.

Read the full report below:

Fiscal Risks Report July 2021 by Joseph Adinolfi Jr. on Scribd

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